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Daily Newsletter, Sunday, 09/29/2002

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The Option Investor Newsletter Sunday 09-29-2002
Copyright 2002, All rights reserved. 1 of 5
Redistribution in any form strictly prohibited.
Entire newsletter best viewed in COURIER 10 font for alignment
In Section One:
Wrap: October Preview?
Index Trader Wrap: Holding the lows, but by a thread
Editor’s Plays: Little Brother is Watching
Market Sentiment: Third Time's a Charm
Ask the Analyst: Coincidentally
Coming Events: Earnings, Splits, Economic Events
Updated on the site tonight:
Swing Trade Game Plan: Ready To Rumble?
Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP (view in courier font for table alignment)
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WE 9-27 WE 9-20 WE 9-13 WE 9-06
DOW 7701.45 -284.57 7986.02 -326.67 8312.69 -124.51 -236.30
Nasdaq 1199.08 - 22.00 1221.08 - 70.28 1291.36 - 3.94 - 19.76
S&P-100 413.22 - 10.68 423.90 - 20.34 444.24 - 2.43 - 14.13
S&P-500 827.36 - 18.03 845.39 - 44.41 889.80 - 4.12 - 22.16
W5000 7872.54 -150.63 8023.17 -417.71 8440.88 - 40.32 -172.84
RUT 361.77 - 5.51 367.28 - 22.70 389.98 - 40.32 + .61
TRAN 2185.17 + 1.15 2184.02 - 62.85 2246.87 - 10.20 - 8.56
VIX 43.14 - 1.41 44.55 + 5.24 39.31 - .73 + 4.24
VXN 57.86 - 1.22 59.08 + 3.23 55.85 - .69 + 1.56
TRIN 2.09 0.86 1.53 0.93
Put/Call 0.90 1.16 0.89 0.79
******************************************************************
October Preview?
by Jim Brown
They tried. They really tried to rally the markets on Friday but
the bad news was simply too widespread for buyers to handle. The
GE news and Phillip Morris warning were only two of the headliners
but there were plenty more that followed the same story line. The
end of quarter window dressing turned into a strip show and traders
in shorts watched as bulls lost the shirts off their backs.
Dow Chart
Nasdaq Chart
The recovery possibilities took another series of hits on Friday
with the results of warnings from GE, SBC, MO, DAL, WYE and PLCE.
The semiconductor sector was hit again after TSM and United Semi
announced cuts in capex spending. New downgrades hit AMCC, BRCM,
CNXT, PMCS, TUNE, TXCC and VTSS. This set the tone for the day and
it was ugly. Still the markets tried to rally off the opening dip
and were somewhat successful until about 11:30 when the bottom fell
out of the Dow. Once the support at 7900 and 7850 broke it was just
a bet to see how far the red ink would run before the close.
The final Q2 GDP numbers came in slightly higher than expected at
1.3% growth but nobody seemed to care. That is ancient history in
the markets. More importantly was the negative growth rate for the
current economy as reflected by the ECRI Weekly Leading Indicators.
After suggesting a +2% growth rate back in early August the numbers
have slowly declined to the -0.1% rate for last week. This, along
with the multiple warnings from a very broad spectrum of companies,
points to the very real possibility of a double dip in progress.
The final revision of the September Consumer Sentiment came in at
86.1, down -1.5 points from August and the lowest level since last
November. The current conditions component fell to 95.8 with more
respondents commenting on wealth fears than any time in the history
of the survey. Even the great market crash in 1987 failed to worry
consumers as much as the current economy. The expectations component
fell to 79.9 on fears that jobs are not stable and layoffs could
continue to worsen. This continued drop in confidence is causing
analysts to reevaluate the outlook for more auto sales and new
home sales. With jobs tight, confidence low and debt levels high
there is not a lot of pent up demand. Those that can afford to buy
toys and houses already have and those that cannot afford it don't
count for future expectations. This predicts lowered spending habits
over the next few months, not increased spending. The holiday retail
buying binge may be sedate with unemployment at 5.9% and growing.
At only 3.9% two years ago the money was flowing freely. It is time
to pay the piper and with the market setting four year lows there
are no savings accounts to draw on for spending cash.
The fund reporting companies said today that August was another
month of net outflows but not nearly as bad as the -$50 billion in
July. September has already gone on record as another outflow month.
Small wonder when Lipper reported that only 62 of 8200 funds tracked
were positive for the quarter. How long will the herd continue to
keep funds in accounts that are negative quarter after quarter?
After five weeks of losses the markets are right back to the closing
lows from July and multiyear lows in come cases. Using the Art
Cashin analogy, Jill and Jane Doe will open the paper this weekend
and see that their 200% to 400% gains from the last four years have
turned into losses instead and decide that bonds suddenly look like
good investments until the economy recovers. That phone will ring
on Monday at their fund headquarters and money will flow out again.
The talking heads were discussing tax loss selling on Friday. This
is an October event because most funds have October year ends. They
will add up their winners and losers and decide how much they can
sell for a profit to offset the tax loss. In a perfect world they
would sell a stock for a profit that had a good run and they felt
had topped to offset losses on investments that failed and they
sold for a loss. This minimizes the overall taxable event and
prevents huge tax loss carry forwards. The problem this year is
lack of winners. Who are they going to sell? While this may be a
problem on the surface there may be more winners than you think.
Looking at a six-year chart as an example MMM was only $70, PG
in the $40s, MO $20, JNJ $30, MSFT $25, Dell $10, AMGN $15, BGEN $20,
ERTS $20, EBAY $20, ESRX $10, INTU $15, IBM $35, UTX $30, WMT $20,
HD $15, QCOM $6. In fund years these prices were last week. With
the fertile field of winners there should be lots of selling to
offset losers. Unfortunately the majority of these stocks are key
components to the major indexes. This means the Dow/Nasdaq may be
very susceptible to October tax selling. It is one thing for the
mutual funds to tell you they lost 25% more of your money and
another thing to realize that it will take years to benefit from
those losses on your taxes. Funds trying to escape more investor
flight will be trying to mitigate those losses as much as possible.
Will there be tax loss selling in October? You can bet on it!
The current quarter is almost certainly to go down as the worst
quarter ever for the Dow. It is down over -16% with one day to go.
The S&P dropped -23% during the 4Q of 1987 and is also down -16%
already this quarter. It would have to drop below 762 on Monday
to equal the 1987 record. The indexes closed at critical levels
on Friday, 7701 for the Dow and 1199 for the Nasdaq. Each only
one point from critical support. September has long been know as
the setup month for October lows. It could not have occurred any
more perfectly if you had been able to script it. The Dow is only
169 points from the July lows and the Nasdaq only 30 points above
the lows for the year. With one day left in September a new low in
October may only need to be a drop of a single point at the open
on Tuesday if Monday follows Friday's pattern.
The economic calendar next week is crucial to the continued
market movement. Monday starts with Personal Income/Spending and
the Chicago PMI. If income/spending shrinks then fears of the
double dip will increase. PMI is expected to drop from 54.9 to
53.0 but without a serious miss this report should be ignored.
It is more watched for evidence of inflation than recession.
Tuesday will focus on the ISM survey for September. Bulls had
better hope the number comes in at the 50.6% forecast because
a number under 50 is recessionary and we are very close to that
trigger. Construction Spending will also be released. Wednesday
has no releases and will continue to be a reaction day for the
ISM. Thursday we get the non-manufacturing ISM and Factory Orders.
Both of these could be very detrimental. Friday is the trump
card with the September Payroll Report. If jobs decreased and
it seems very unlikely that they didn't, then the July market
lows, if not already broken, will be toast. This is the critical
week for the month economically. This is the yardstick for the
economy in precise terms. If orders are falling and jobs are
being lost then the hand writing is on the wall.
The main point I got from last weeks news events was that CEOs
seemed to be even more worried than in the past. Knowing that
earnings are 2-3 weeks away and the end of quarter sales were
not shaping up well, they were using very cautious terms to
describe the outlook. John Chambers tripped over his tongue
several times trying to be cautious in his presentation but get
across the concern that companies had even less visibility than
before. (translation = significantly fewer orders than expected)
It appears to me that the economy hit a wall in August/September
but nobody wants to admit it. Corporate America, economists and
the Fed are all hoping that seasonal holiday buying will somehow
rescue the economy from the double dip. Treasury bond yields are
still dropping like a rock as investors go for value but corporate
bonds are soaring as worries over corporate profits are increasing.
The bond markets tend to lead the stock market and the economy
and they are telling us that our economic troubles are not over.
Enter Very Passively, Exit Very Aggressively!
Jim Brown
"A loss never bothers me after I take it. I forget it overnight.
But being wrong and not taking the loss, that is what does the
most damage to the wallet and the soul" - Jesse Livermore
Reader comments are always welcomed.
If this commentary helped you please let us know.
comments@OptionInvestor.com
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INDEX TRADER SUMMARY
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Holding the lows, but by a thread
It was a down day on Wall Street as early technology bullishness
faded into the sunset as troubles lurked among Dow components.
What started out as a mixed session has the markets seeing red by
sessions end.
My observations made from stocks I was following during the day
was that of market makers and specialists backing away from solid
bids and letting the bulls sell what they would into today's
close.
In Thursday night's wrap, we thought a move lower in the markets
might be triggered with a move below the $78.40 level in the Dow
Diamonds (AMEX:DIA) $76.85 -3.7%, which would equate to Dow
Industrials (INDU) 7,840. When the Dow broke that 7,840 level,
all heck broke loose with the Dow loosing an additional 139
points (-1.7%) to close 7,701.45 (-3.69% on the session).
One subscriber asked that I attempt an update that is
"simplistic" and perhaps not so cluttered with observations and
intra-day trigger points.
I think that's a great idea! I really wanted to whip out a point
and figure chart and just look at the supply/demand levels, but
then I figure not everyone is familiar with the interpretation of
the point and figure charts, which are primarily used by
institutions in their options strategies to assess risk/reward in
their portfolios/inventory
However, I am going to draw some "simple" levels that correlate
against the point and figure charts of the indexes where
potential buy and sell signals would be generated.
Dow Industrials Chart - Daily Intervals
Today's reversal lower in the Dow Industrials from the 8,000
level now puts in place resistance at 8,000. It would take a
trade at 8,050 to generate a "buy signal" on the INDU chart ($50
box is conventional scale). A trade at 7,650 would generate
another "sell signal" on the point and figure chart. I've market
7,665 on the above chart to mark the monthly lows. A break lower
at 7,665 and 7,650 then has the 52-week low of 7,532 in play.
The Dow Industrials point and figure chart has exceeded its
bearish vertical count of 8,150, which was initially triggered
after a triple-bottom sell signal at 8,750 on August 28th.
While Professor Davis' probabilities study was focused on stocks,
not indexes and sectors, his study did reveal that in a "bear
market" (as depicted by the bullish % charts) the triple-bottom
sell signal was profitable in a bearish trade 93.5% of the time,
for an average gain of 23% in 3.4 months. From Dow 8,750, a bear
might be targeting 6,738 in 3.4 months from the August 28 date.
I've decided to be more "conservative" and used the Dow Diamonds
(AMEX:DIA) $76.85 -3.7% point and figure chart's ($1 box scale)
bearish vertical count of $74, to derive a target of 7,400 for
the Dow Industrials.
According to www.stockcharts.com, the Dow Industrials Bullish %
($BPINDU) is currently in a "bull correction" market at 16.67%
bullish, after reversing from "bull confirmed" status in late
August at 60%.
How telling was the August 28th 01:00 EST Update?
http://members.OptionInvestor.com/archive/intraday/2002/082802_3.asp
In our past market wraps, I've attached the bottom of our
retracement to $74.55, or approximately 7,455 INDU. This is to
mark an early alert that if traded, the Dow Diamonds (DIA) would
be getting close to the point and figure chart's bearish vertical
count of $74.00.
S&P 500 Index Chart - Daily Intervals
Today's reversal lower in the SPX now has resistance looking
formidable between 860 and 880. It would currently take a trade
at SPX 860 to negate the current bearish vertical count of 715.
A break lower at 815 generates another sell signal in the SPX
point and figure chart ($5 box scales) and puts into play the
previous lows of 776.
However, compared to the 52-week lows, the S&P 500 Bullish %
($BPSPX) from www.stockcharts.com hints there is still some
bullish risk that could be reduced, when comparing the current
32% bullish reading against the old low's reading of 12%.
Traders that may have established a partial bearish position can
monitor a potential upward trend I've placed on the chart.
Should the SPX break below 815, a bear could leg in further, with
a trailing stop above 860.
09/27/02 SPX Contracts - Sorted by Oct&Dec Open Interest
Volatility? As a follow on to our September 22nd discussion
regarding potential support/resistance levels for current month
and quarter. Today I'm looking at this WEEK'S RANGE. Using the
same math from the 09/22 update, traders can eyeball potential
support/resistance level, but using this week's range to build an
"average." Again, we can't say for certain that this week's
trading in the October 800 puts is a true weekly average of
$17.30, which might hint at October support of SPX 782, but it's
interesting nonetheless that this "782" isn't too far off from
our 09/22 calculation using this contract of 780.75.
Also interesting to note some of the growth/decline in open
interest among the various contracts (compare back to 09/22
update). The December 750 puts (spzxj) continue to draw
interest, with potential quarterly support being calculated from
this week's range as 723. Hey! That right about what we
calculated a week ago in the Dec. 750's.
If your trading October expiration, I think its important to
understand how the 60-minute intervals help define IMPORTANT
action points.
If you like to trade in options and view them as an opportunity
to control risk and expose less capital in a trade, but don't
like the volatility, note the WEEKLY ranges between October and
December expirations. Be honest with yourself with regards to
how volatility impacts YOUR emotions. We all get "big eyes" when
we understand an option went from $4 to $12 in a week, but get a
shrinking stomach when the trade goes the other way.
S&P 100 Index Chart - Daily Interval
I don't have much to add to the OEX that I didn't say in the SPX.
Resistance now looks formidable from 435-440 and traders will be
using the 21-day SMA, currently at 438.40 as a trailing stop. A
break below 405 generates another sell signal on the point and
figure chart. It's interesting and perhaps useful to and SPX
trader that the OEX bearish vertical count is ABOVE the recent
lows at 390 OEX. While an SPX bear may have his/her eye's set on
715 longer-term, it might be worth monitoring the OEX and your
SPX trade should the OEX fall to 390.
Please remember, the bullish and bearish vertical counts are used
to help assess potential longer-term upside and downside. Some
can be exceeded, some are traded almost to a dime, while some are
never reached.
Well... my q-charts froze up on me and now I've lost my bar
charts for the NASDAQ-100 Index (NDX.X) 860 -1.53%. So let's
look at the NASDAQ-100 Index Tracking stock (AMEX:QQQ) $21.31
-1.34%.
I spent some time in today's market monitor outlining a bearish
trade in the QQQ and then again in today's 01:00 PM EST Update.
While the QQQ fell just -1.34% on the day, but from market
monitor profile at $21.87 (12:48:44) and close of $21.39, the
2.19% decline wasn't too bad. The question now is will the
decline continue. I think so, but will follow with a stop just
above $22.33 to be safe.
NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval
I view today's close back below our $21.44 level of retracement
support as negative and now has the lows of $20.65 in play and
target of $20.20 also in play.
There were a lot of stocks that really saw some downside movement
after the Dow Industrials broke below the 7,840 level and really
hints that market makers and specialists really backed off their
bids. Oh they kept the bids large enough to provide some
liquidity to selling bulls, but there wasn't a lot of size
available.
It wasn't until about 30-minutes before the close that I did
notice several NYSE listed stocks "firm up," but there also
wasn't a lot of selling hitting bids either.
To me this late-day action depicted a market that was selling
into the weekend, especially when the Dow started losing support
as of to say... "we'll get them next week."
But then... that's what bull's might of thought last Friday.
Here's a look at this week's major market index and various
sector action.
I need to make note that last week's "Since 12/31" was incorrect.
I calculate the various % declines in Microsoft Excel and didn't
change that column's formula to properly reflect the year-to-date
change.
I've double checked this week's spreadsheet and believe it to be
accurate.
Weekly Index / Sector Changes
Networking (NWX) and Fiber (FOP), two of my most "loved-to-hate"
sectors in the past year (on the thought that telecom services
companies as depicted by the IXTCX and XTC won't increase
spending), got hammered hard this week, especially today when
telecom service provider and Dow component SBC Communications
(NYSE:SBC) $20.15 -7.99% said it was going to further cut jobs
along with capital expenditures.
That news had Cisco Systems (NASDAQ:CSCO) $11.23 -1.13%
undercutting its 52-week low of $11.14 by a penny on an intra-day
basis and an old friend from the past in Ciena (NASDAQ:CIEN)
$3.18 -8.09% closing at a new 52-week low.
Airlines got hammered once again on a weekly basis and really
weighed on the Dow Transportation Index (TRAN) 2,185 -3.71%.
Semiconductors (SOX.X) performed relatively well on a weekly
basis as well as today. This index has traded "inside days" for
two consecutive sessions. A break above today's highs of 257
could drive some bullish tech action, while a break below today's
lows of 245, could have the proverbial plug being pulled for a
flush lower. These "inside days" are similar to little
"triangles" on a point and figure chart, but depict that supply
and demand are battling it out. Sometimes, on the break of
direction from the short-term consolidation, one side gives in
(bulls or bears) and a powerful moved can take place from the
break of consolidation.
Jeff Bailey
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Editor's Plays
**************
Little Brother is Watching
Last week I profiled INVN and ADRX as longer-term plays. INVN
had a nice week despite the negative market conditions and ended
up +2.00 for the week despite a profit taking dip on Friday. This
play got off to a nice start.
ADRX also rose dramatically after an early week dip with the market.
This is a long term play that is waiting on a pending drug patent
decision that would make Prilosec available as a generic.
*****************
CPS - ChoicePoint $32.75
Today I want to highlight another recovery candidate. The company
specializes in background checks. Yawn! This is exactly what I
thought until I heard Ron Baron, President of Baron Capital on
Rukeyser on Friday night. Baron manages $5.5 billion and has the
number two midcap growth fund out of 700 and the number one small
cap growth fund out of 200 tracked by Morningstar over the last
nine months.
He said this company has gathered more information about individuals
than the FBI, CIA and all the government organizations together.
They have court records, criminal records, gun permits, drivers
licenses, traffic tickets, credit reports, tax liens, etc on almost
every individual and company in America. This is scary.
However scary the thought of having an individual company accumulate
these records on everyone the bottom line is that they are charging
everyone including the FBI and CIA, which are their biggest customers,
to access them. With the increased security environment we are
moving into this company is in the right place at the right time.
Ron Baron said they get an average of $15 a background check now
but as more critical record elements are added to their files he
expects them to get as much as $100 for a comprehensive check later.
I did some research on my own and despite not being able to find
out why the bottom fell out of the stock on Friday I was amazed
by all they do. They provide insurance scores on you for homeowners
insurance as well as auto insurance. This is the big thing that
was discussed on CNBC last week. Insurance companies charging more
for insurance based on an overall score that includes credit reports,
insurance claims, criminal history, etc.
While I personally don't like the idea that this information is
available to anyone with a credit card OR even the government for
that matter, I can't argue with their future.
They have quietly gathered an enviable amount of data and a method
for organizing it for immediate retrieval. In the big brother world
of airline hijackers and terrorist infiltration this instant background
info would go a long way toward preventing the bad guys from being
in the right place at the wrong time.
I said earlier that the bottom fell out of the stock on Friday. I
could not find anything anywhere that would account for the selling.
Considering this company was less than $10 five years ago it could
be profit taking by funds for tax loss purposes as I mentioned in
the market wrap this weekend. This is just a guess and I would want
to see some rebound before jumping blindly into the stock.
The April-2003 $35 call was the lowest strike you could get a quote
on Friday night. CPS-DG was ask at $3.30. The $30 strike CPS-DF was
showing on Qcharts but with no price so I assume it will be available
on Monday. I wish this company had leaps but it doesn't.
The stock hit a session low at 2:24 on Friday and then traded
sideways the rest of the day despite the market crash. It is entirely
possible a fund was liquidating profits and was trying to raise money
before month end. With 1.8 million shares traded (six times average
volume) I am surprised it did not drop more than the -3.75. I think
this shows there were buyers waiting. Remember the Dow was down -295.
Ron Baron was pounding the table on this stock on Friday. Doomsayers
will say he was protecting his position from further drops. I believed
him enough to think this was a buying opportunity. I would like to
watch it for a couple days and only buy if there is an uptick. When
the unexplained happens it is best to see if a reason appears. If
we watch for $2-$3 it will not matter that much in the long run. With
the markets likely to go lower I could see ALL stocks going lower
including this one.
My preferred entry point would be a limit order at $30 for the $35
April call option. That allows seven months for a small rebound if
we are lucky enough to get filled at $30. If a $30 put strike appears
on Monday for November I would buy it in a heartbeat as a hedge
against a drop through $30. I would then put in my order for an
April $35 call at $30 and hope for a drop. The profit in the put
over the next two weeks could pay for the April call. That is exactly
where I would close the put. When the profit paid for the call. Pigs
get fat, hogs get slaughtered. There is strong support at $30 so I
would not expect it to fall much further.
********************
Remember, these are high risk plays and should only be made
with risk capital.
Good Luck
Jim Brown
****************
MARKET SENTIMENT
****************
Third Time's a Charm
by Steven Price
Boy, that was quick. This morning's economic data wasn't that
bad. GDP slightly came in slightly above expectations, at 1.3%
and Consumer Sentiment was basically in line with expectations,
at 86.1. While the Sentiment reading of 86.1 was down for the
fourth straight month, it just barely missed the preliminary
reading of 86.2. Most of the drop was focused in consumers'
economic outlook, with the current conditions index falling from
98.5 in August to 95.9 in September.
The Dow opened down only slightly. This was quite a surprise
after Philip Morris' warning last night after the bell was
accompanied by SBC's layoff announcement. After looking for a
big drop on the open, it appeared the day would be just another
boring, low volume Friday. Of course, there hasn't been a boring,
low-volume, non-holiday in months, so I should have known better.
The Consumer Confidence number came out mid-morning, and was
followed by a slight rally. However, the news from several
sources began to overwhelm the bulls and it was slowly downhill
from there. GE reaffirmed its guidance, but CFO Keith Sherin
said that 2003 was looking more challenging than had been
expected previously. This sounds as though a warning for next
year may not be far off. Apparently investors agreed, as the
stock sold off $1.92 (7%) to close at $24.47.
Delta Airlines then warned, stating that it would lose $350
million in the third quarter and would layoff 1,500 flight
attendants. It said travel in September was worse than even the
lowest forecasts and fueled bankruptcy speculation. Delta
finished the day down $2.81 (24%) at $8.69.
Retailers took a tumble after Children's Place (PLCE) warned that
3rd and 4th quarter earnings would fall short of estimates, due
to weak sales in September. Same store sales had fallen 30% for
the month of September and 22% for the quarter, so far. Analysts
were expecting a profit of 0.57 for the third quarter and 0.72
for the fourth. The company now said it would only break even,
at best. The stock lost $4.99 (31%) to close at $11.15.
One bright spot, if you can consider a 0.71% loss a bright spot,
was the semiconductors. I've been beating up on this sector for
some time now, but it appears to have found at least a temporary
bottom. The index lost a third of its value between the August
22 and September 23, when the Semiconductor Sector Index (SOX.X)
closed at 236. The index rebounded over 250, and has held steady
in that range, closing today at 246.58. While it was still in
the red, it showed great relative strength. It may simply be
compressed to the point where the sellers are exhausted for the
time being and I'm not ready to get long this group just yet.
The HMOs and Health Providers showed a gain, as well. This is
likely due to recent news from Tenet HealthCare that its earnings
would beat estimates by $0.05. Higher patient fees are expected
to give hospital profits a boost this quarter, and this was
reflected in the increase of the Morgan Stanley Health Provider
Index (+0.59 %) and the Morgan Stanley Health Care Index (+0.25%).
In addition, a Thursday court decision, which allowed
600,000 physicians to bring a class action fraud suit against
U.S. HMOs, also denied class-status to approximately 145 million
patients served by the providers. This may be contributing to
the sector's strength, as well.
Today's near 300-point drop in the Dow all but erased the gains
of the last two days. The only bullish (and I use this term
loosely) sign that can be found is the rebound back over 7700 at
the close. The index finished down 295.67, to close just off its
lows, at 7701.45. We have now landed near the July closing lows
twice this week. Tuesday saw a close 19 points below that level,
and today we ended 1 point below. What seems equally significant
is that the bounce after the first test was turned back soundly
at 8000. Because we have now tested support on three occasions
at this level, my guess is that a drop through it will be severe.
The next target to the downside is 7532, which is the intraday
low from July 24. There is some support around 7400 from 1997
and 1998, as well. However, I think if we can get through 7500,
we will be testing 7000 rather soon. At the same time, the other
silver lining can be found in my earlier statement, is that we
have tested SUPPORT here on three occasions. If we are going to
bounce, this looks like the level at which it will happen. If
we follow through with the current drop on Monday, I will be
short ASAP. If not, I will be watching 8000 as the pivot point
to the upside. A tick above 8000 is not going to be enough,
however, as it will take a close above that level to push me out
of the way.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 10679
52-week Low : 7532
Current : 7701
Moving Averages:
(Simple)
10-dma: 7978
50-dma: 8419
200-dma: 9538
S&P 500 ($SPX)
52-week High: 1176
52-week Low : 775
Current : 827
Moving Averages:
(Simple)
10-dma: 849
50-dma: 886
200-dma: 1038
Nasdaq-100 ($NDX)
52-week High: 1734
52-week Low : 843
Current : 860
Moving Averages:
(Simple)
10-dma: 873
50-dma: 932
200-dma: 1251
-----------------------------------------------------------------
The Semiconductor Index (SOX.X): I think I need to quit beating
up on this sector, as it has been flexing a little muscle lately.
The index gave up less than 1% on a day when the Dow was down
almost 300 points. After bouncing at 230, the SOX seems to have
found a home around 250. If these stocks have truly been sold
down to proper valuations, they could be laying the groundwork
for a turnaround. The broader markets will need to find a bottom
first, but these gave us the first signs of underlying weakness in
the middle of August, and now they are showing some strength.
52-week High: 657
52-week Low : 236
Current : 246
Moving Averages:
(Simple)
10-dma: 252
50-dma: 305
200-dma: 464
-----------------------------------------------------------------
Market Volatility
The VIX is still over 40, and looks to be headed much higher. If
the current level of support, dating back to July, breaks down,
then we could see 50 very soon. The trend of higher lows and
higher highs is the reverse of the broader indices. While VIX
spikes are usually followed by market rallies, right now we are
seeing a slow progression upward, which doesn't seem very
bullish.
CBOE Market Volatility Index (VIX) = 43.14 +3.02
Nasdaq-100 Volatility Index (VXN) = 57.86 –1.23
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.88 448,972 397,334
Equity Only 0.67 347,236 232,143
OEX 1.19 23,059 27,382
QQQ 0.46 45,041 20,853
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 33 - 1 Bull Correction
NASDAQ-100 22 + 0 Bear Confirmed
Dow Indust. 17 + 0 Bull Correction
S&P 500 30 + 0 Bear Confirmed
S&P 100 25 + 0 Bear Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.54
10-Day Arms Index 1.59
21-Day Arms Index 1.49
55-Day Arms Index 1.34
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
Advancers Decliners
NYSE 690 2034
NASDAQ 978 2200
New Highs New Lows
NYSE 31 121
NASDAQ 13 201
Volume (in millions)
NYSE 1,777
NASDAQ 1,437
-----------------------------------------------------------------
Commitments Of Traders Report: 09/24/02
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
Commercials reduced long and short positions, however ended up
with a net 10,000 fewer short contracts. Small traders reduced
both positions, as well, but shortened up their net long
positions by 14,000 contracts.
Commercials Long Short Net % Of OI
09/03/02 431,755 468,529 (36,774) (4.1%)
09/10/02 426,230 470,537 (44,307) (5.0%)
09/17/02 476,224 503,268 (27,044) (2.7%)
09/24/02 425,276 442,661 (17,385) (2.0%)
Most bearish reading of the year: (111,956) - 3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01
Small Traders Long Short Net % of OI
09/03/02 158,262 80,130 78,132 32.8%
09/10/02 166,696 85,259 81,437 32.3%
09/17/02 182,243 116,377 64,866 21.7%
09/24/02 124,232 73,506 50,726 25.7%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
NASDAQ-100
Commercials reduced long and short positions, but got decidedly
shorter, by a total of 4700 contracts. Small traders also
reduced positions, however stayed close to flat overall.
Commercials Long Short Net % of OI
09/03/02 46,712 53,287 (6,575) ( 6.6%)
09/10/02 53,309 58,745 (5,436) ( 4.9%)
09/17/02 72,522 75,815 (3,293) ( 2.2%)
09/24/02 46,637 54,613 (7,976) ( 7.9%)
Most bearish reading of the year: (15,521) - 3/13/02
Most bullish reading of the year: 9,068 - 06/11/02
Small Traders Long Short Net % of OI
09/03/02 11,150 7,720 3,430 18.2%
09/10/02 14,024 10,494 3,530 14.4%
09/17/02 15,288 14,142 1,146 3.9%
09/24/02 11,163 9,421 1,742 8.5%
Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year: 8,460 - 3/13/02
DOW JONES INDUSTRIAL
Commercials reduced positions dramatically on a percentage basis,
but got longer overall, by 3200 contracts. Small traders also
reduced positions, but flipped from the long side to short
overall.
Commercials Long Short Net % of OI
09/03/02 21,161 13,792 7,369 21.1%
09/10/02 22,946 14,936 8,010 21.1%
09/17/02 26,863 21,187 5,676 11.8%
09/24/02 18,951 10,074 8,877 30.6%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
09/03/02 6,395 7,966 (1,571) (10.9%)
09/10/02 7,568 10,129 (2,561) (14.5%)
09/17/02 13,393 11,637 1,756 7.0%
09/24/02 7,939 9,453 (1,514) ( 8.7%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 1,909 - 1/16/01
-----------------------------------------------------------------
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***************
ASK THE ANALYST
***************
Coincidentally
by Steven Price
Steven,
Can you please give me a hand evaluating QLGC. I am holding the
Oct 35 puts. After a huge drop yesterday it is holding up
remarkably well today. On the bearish side it just gave
descending triple bottom alerton a PnF chart, and the next
historical support level is under 20.00. On the bullish side it
is, for the most part, ignoring today's downdraft. I have a stop
in place such that any significant up move would leave me flat,
but I struggle with taking profits here or letting things play
out.
How would you evaluate the situation?
I would look at several different aspects of QLogic (QLGC). First
of all, I'd look and see what else is going on with the chip
stocks, since it falls under that heading. A look at the
Semiconductor Index (SOX.X) will give you a snapshot of the
environment you're trading in.
Since you've already referred to the point and figure chart, I
would look at where the stock stands in relation to its targets
and support on that chart.
I would also look at the daily chart to determine obvious trends
and channels, as well as support and resistance lines.
A look at the point and figure chart shows something interesting.
The current bearish count was just achieved at $27, the same point
it held up today.
The next sell signal comes at $26.00, but you have earlier support
at $27, as well. As far as the descending triple bottom breakout,
I'm not sure I see that as clearly as the double bottom it is in
right now. There is a succession of lower lows and certainly a
pattern of breakdowns from the double and triple bottom
formations.
A look at the SOX also shows the chip stocks finding support as a
whole. The index had been hammered, losing 35% of its value since
August 21. It seems to have found some support, whether from
current valuations, or an exhaustion of sellers.
Now that you've seen support on the point and figure and in the
sector, let's look at the daily chart. On the daily Qlogic is at
the bottom of a descending channel. It looks like today's rebound
was pretty close to the bottom trend line, which indicates some
support there as well.
If the market breaks down again on Monday, the support levels
above may all fall. A trade of $26 is a breakdown on the daily
chart and a sell signal on the point and figure and would signal
more weakness. However, the stock is currently up against three
different types of support. Because I still think the sector has
more downside, I would probably either close 1/2 the position and
let the other half ride with a tight stop, or tighten the stop
above today's high of $27.65.
In looking at all of these charts together, you get a better idea
of what you are up against and can use that information in
determining whether or not to close the position.
Please send your questions and suggestions to:
Contact Support
*************
COMING EVENTS
*************
==================================================
Market Watch for the week of September 30th
==================================================
------------------------
Major Earnings This Week
------------------------
Symbol Company Date Comment EPS Est
------------------------- MONDAY -------------------------------
WAG Walgreen Mon, Sep 30 -----N/A----- 0.25
------------------------- TUESDAY ------------------------------
PBG Pepsi Bottling Group Tue, Oct 01 Before the Bell 0.61
SVU Supervalu Tue, Oct 01 After the Bell 0.44
----------------------- WEDNESDAY -----------------------------
ATYT ATI Technologies Wed, Oct 02 -----N/A----- 0.02
CM Coles Myer Wed, Oct 02 After the Bell N/A
FDO Family $ Stores, Inc. Wed, Oct 02 Before the Bell 0.24
THC Tenet Healthcare Wed, Oct 02 Before the Bell 0.65
------------------------- THURSDAY -----------------------------
EMMS Emmis Communications Thu, Oct 03 -----N/A----- 0.02
MAR Marriott Int’l Thu, Oct 03 -----N/A----- 0.42
------------------------- FRIDAY -------------------------------
AA ALCOA Fri, Oct 04 -----N/A----- 0.28
----------------------------------------------
Upcoming Stock Splits In The Next Two Weeks...
----------------------------------------------
Symbol Company Name Ratio Payable Executable
None
--------------------------
Economic Reports This Week
--------------------------
Next week is packed with economic reports. Income and spending
numbers come out on Monday. Auto sales and construction spending
on Tuesday. ISM services on Thursday and more employment reports
on Friday. Despite these reports the biggest market moving events
will continue to be earnings warnings and misses.
==============================================================
-For-
Monday, 09/30/02
----------------
Personal Income (BB) Aug Forecast: 0.5% Previous: 0.0%
Personal Spending (BB) Aug Forecast: 0.5% Previous: 1.0%
Chicago PMI (DM) Sep Forecast: 53.0 Previous: 54.9
Tuesday, 10/01/02
-----------------
Auto Sales (NA) Sep Forecast: 6.1M Previous: 6.6M
Truck Sales (NA) Sep Forecast: 7.8M Previous: 8.8M
ISM Index (DM) Sep Forecast: 51.0 Previous: 50.5
Constrction Spending(DM)Aug Forecast: -0.1% Previous: 0.0%
Wednesday, 10/02/02
-------------------
None
Thursday, 10/03/02
------------------
Initial Claims (BB) 09/28 Forecast: N/A Previous: 406K
ISM Services (DM) Sep Forecast: 51.4 Previous: 50.9
Factory Orders (DM) Aug Forecast: -1.5% Previous: 4.4%
Friday, 10/04/02
----------------
Nonfarm Payrolls (BB) Sep Forecast: 15K Previous: 39K
Unemployment Rate (BB) Sep Forecast: 5.9% Previous: 5.7%
Average Workweek (BB) Sep Forecast: 34.1 Previous: 34.1
Hourly Earnings (BB) Sep Forecast: 0.3% Previous: 0.3%
Definitions:
DM= During the Market
BB= Before the Bell
AB= After the Bell
NA= Not Available
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SWING TRADE GAME PLAN
*********************
Ready To Rumble?
The worst month of the year is ahead of us and the economy may be
headed into a double dip recession. War worries are everywhere and
oil is over $30 a barrel. The markets closed exactly on the edge
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The Option Investor Newsletter Sunday 09-29-2002
Sunday 2 of 5
In Section Two:
Stock Pick: FLEX - Flextronics International
Daily Results
Call Play of the Day: LLL
Put Play of the Day: KSS
Dropped Calls: ABT
Dropped Puts: BGEN, FISV
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Stock Pick
**********
FLEX - Flextronics International - $7.20
Strategy: Long stock with put insurance
As the Technology bubble has deflated over the past 2 years,
demand for virtually everything technology-related has waned,
from business IT equipment to consumer electronics. The
Networking, Semiconductor and Storage sectors have all been
pummeled to new multi-year lows recently. Against that backdrop,
it should come as no surprise that FLEX is currently resting
near multi-year lows. That said, it is impressive that the
stock is still holding above its July lows, which is in sharp
contrast to much of the Technology market.
FLEX appears to have found a bottom from which it can rally once
signs of a rebound in demand begin to appear. As the largest
assembler of other companies' Technology products, this is one
company that will roar higher once the recovery begins. Fellow
EMS company SLR was upgraded by Thomas Weisel last week due to
better than expected earnings, and this could be a leading
indicator that FLEX will likewise begin to show a better
earnings picture when it reports its Q3 results on October 24th.
The forthcoming earnings season will provide an opportunity to
gauge how close or distant any recovery in the EMS sector is by
listening to what the CEOs of the major Semiconductor, Networking
and Wireless product manufacturers have to say about demand in
their particular industries. FLEX won't start to move upwards
until investors can see the evidence of increasing order flow.
But once it starts, FLEX will likely have an impressive run.
Apparently we aren't the only ones to notice the value here,
as the stock continues to find buying interest every time it
nears the $6.50 level, which is just above the $5.85 July lows.
Use dips near this support level to enter the play, targeting
the $10 level (near the August highs) initially. Once clear of
that resistance level (which will require that evidence of
improving demand), eager technology bulls will be setting their
sights on the $12.75 resistance level, and then $15.
The play is to go long FLEX stock at our target of $6.75-7.00
and go long one contract of the Jan-2003 $5.00 puts QFL-MA at
$0.55 for each 100 shares you are long. There is no requirement
to go long the put but it does prevent all but a very minimal
loss should something unexpected happen to FLEX.
Option 1: If FLEX is not above $9.00 by Jan 2nd, close both
positions and exit the play.
Option 2: If FLEX is below $6 on Jan 2nd then you have the
option of closing the put for a slight profit and lowering your
basis in the long stock play by the amount of the put premium
received or closing both positions and exiting the play.
Option 3: If FLEX is above $10.50 by Jan 2nd then close the put
position for any remaining premium and set a stop loss on the
stock at your entry point of $6.75-7.00 plus any short fall on
the put premium. ($8.00 max)
***********************************************************
DAILY RESULTS
***********************************************************
For Best Alignment view in Courier Ten Font
*******************************************
CALLS Mon Tue Wed Thu Week
ABT 40.35 -0.11 0.40 1.30 -1.90 -1.46 Drop,blame WYE
LLL 54.91 1.10 0.69 -0.91 –0.94 -0.09 support
PUTS
BGEN 29.39 -1.35 -0.31 0.76 0.06 -1.35 Drop,slow
BSC 56.46 0.39 -1.21 0.07 1.00 -0.54 bear rally
CI 71.96 -0.98 -2.04 –0.80 2.70 -0.64 lower premium
FDX 50.45 1.05 -0.45 0.80 2.30 2.70 New,out of gas
FISV 28.54 -0.62 -0.99 –1.07 0.68 -2.67 Drop, pattern
FNM 61.51 1.15 -1.40 -0.38 0.92 -2.84 New, big risk
GM 39.79 -0.97 -2.73 1.39 1.95 -2.76 pension probs
KSS 64.09 -1.15 -1.45 -0.44 0.29 -4.51 New, breakdown
SPC 28.79 0.48 -0.02 -1.23 0.35 -0.88 New,floor gone
TECD 27.24 -0.75 -0.28 0.51 –1.64 -3.31 heavy
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********************
THE PLAYS OF THE DAY
********************
Call Play of the Day:
*********************
LLL - L-3 Communications Holdings $54.91 (-0.04 last week)
See details in play list
Put Play of the Day:
********************
KSS - Kohls Stores - $64.09 -3.20 (-5.46 for the week)
See details in play list
**************************
PICKS WE DROPPED THIS WEEK
**************************
Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.
CALLS
^^^^^
ABT $40.35 (-1.55) Abbott suffered a double dose of bad news the
last couple of days. The downgrade on Thursday drove the sock to
just below $42. The hold at the PnF breakout level convinced us
to give it another day. Unfortunately, Wyeth warned that
earnings would fall below estimates this morning, without giving
specific guidance. It based this warning on falling sales of its
hormone replacement product Premarin, and disappointing results
in its vaccine and animal health business. Wyeth gave up $7.35,
and dragged the sector down with it. There were not enough
buyers willing to step up and keep ABT out of its previous
consolidation pattern, so we will drop the play as the trend we
were looking to capture has been broken.
PUTS
^^^^
BGEN $29.39 -1.01 Biogen has taken the brunt of several
downgrades, and yet held its current level for several days.
While it gave up $1.01 today, the breakdown we were looking for
has not materialized. We have not had the play on very long, and
have decided to close out near where we started. If BGEN breaks
below $28.50 on Monday, traders may want to consider holding the
play, but we are closing it as an official OI selection due to
lack of movement.
---
FISV $28.54 -0.24 FISV has dropped just over a dollar since we
picked it. While this is a move in the right direction, we have
noticed a pattern that we do not find encouraging. The last two
days the stock has reached higher intraday highs and experienced
higher intraday lows. The market suffered a major breakdown
today, and FISV lost only -$0.24. At this point we will take our
profit on the play and invest it elsewhere. The relative
strength is not what we look for in an OI Put Play, as we would
have expected a bigger drop, given the activity of the overall
market.
***********
DEFINITIONS
***********
SL = Suggested stop loss. Sell if bid breaks this price.
OI = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume
The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.
Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;
Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"
Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.
RISKS of SELLING PUTS:
The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.
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DISCLAIMER
**********
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The Option Investor Newsletter Sunday 09-29-2002
Sunday 3 of 5
In Section Three:
New Calls: (See Note)
Current Calls: LLL
New Puts: FNM, KSS, FDX, SPC
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**************
NEW CALL PLAYS
**************
Our current market sentiment is still down, so we are not adding
new calls at this time. However, for those readers looking for
new call plays, we will place some possibilities on this
weekend's Watch List. If you are looking for new calls, please
review these selections.
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******************
CURRENT CALL PLAYS
******************
LLL - L-3 Communications Holdings $54.91 (-0.04 last week)
Company Summary:
As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.
Why We Like It:
Beginning on a bearish note on Friday following more negative
earnings news, the broad markets drifted lower through midday
when it really took a turn for the worse. Most sectors ended
the day in the red, and the Defense Industry index (DFI.X) shed
nearly 3% by the closing bell, coming right back to the $560
support level. LLL continued to consolidate on Friday, slipping
back by a bit more than 2%, and once again finding support near
the $54 level. Recall that the $53.50 level has provided strong
support recently, and with the 2-month ascending trendline now
resting at $54, the 200-dma at $53.44 and the 20-dma at $54.47,
this could prove to be a solid level we can use for new entries
early next week. Look for a dip to and rebound from this area
of support before initiating new positions, and make sure to
confirm renewed strength in the DFI index before playing. Our
stop remains at $53.50. Traders looking for confirmation before
entering will want to wait for LLL to push back above the $56
level first. Keep in mind that part of our basis for this play
is that the stock (and sector) should continue to benefit from
escalating war tensions, and any uptick in those tensions should
have the bulls focusing their attention here next week.
BUY CALL OCT-55*LLL-JK OI=2138 at $2.60 SL=1.25
BUY CALL OCT-57 LLL-JY OI=2815 at $1.50 SL=0.75
BUY CALL NOV-55 LLL-KK OI= 32 at $4.20 SL=2.50
BUY CALL NOV-60 LLL-KL OI=1150 at $2.00 SL=1.00
Average Daily Volume = 1.80 mln
*************
NEW PUT PLAYS
*************
FNM - Fannie Mae - $61.51 -3.36 (-3.09 for the week)
Company Summary:
Fannie Mae is a New York Stock Exchange company and the largest
non-bank financial services company in the world. It operates
pursuant to a federal charter and is the nation's largest source
of financing for home mortgages. Fannie Mae is working to shrink
the nation's "homeownership gaps" through a $2 trillion "American
Dream Commitment" to increase homeownership rates and serve 18
million targeted American families by the end of the decade.
Since 1968, Fannie Mae has provided $4 trillion of mortgage
financing for more than 45 million families. (source: company
release)
Why We Like It:
While much of America has rejoiced over low interest rates and
the ability to refinance mortgages, Fannie Mae has not been so
lucky. As homeowners refinance and buy in old loans, those
loanholders are left trying to replace high interest payments
with low interest payments. Not a very good equation from their
standpoint. There is speculation that Fannie Mae will have to
purchase as much as $100 billion worth of ten year bonds, which
has resulted in an Intermediate Treasury rally over the last
week. The speculation is that FNMA needs to balance its $750
billion risk portfolio, which has ballooned due to mortgage
refinancings, as FNMA's mortgage assets have shrunk relative to
its liabilities. As rates continue to drop, and refinancing
steams ahead, FNMA takes on more risk that it will eventually
need to hedge. That risk hedge could cost it plenty of money.
On Thursday, worries about Fannie Mae's difficulty in managing
its interest-rate risk prompted a large 10 basis point widening
in agency debt spreads over Treasuries. With two for the FOMC
Fed governors now leaning toward further rate cuts, the
likelihood of a reversal of interest rates to the upside becomes
less likely.
In addition to the immediate portfolio risk, there has been talk
of privatizing the agency completely, erasing its current quasi-
government status. This would subject FNMA to the same audits,
SEC rules and risk requirements as other lenders and could
inflict more damage on the already troubled institution.
Investors and institutional holders have taken notice and piled
on, with the stock dropping from a recent high of $77.00 on
September 9 to today's close at $61.51. The stock has bounced
off the $61.50 level on three occasions this week, with today's
close of $61.51 its weakest recovery yet from that point. The
stock is in a descending channel on the point and figure, and a
trade of $60 will provide a fresh sell signal on a descending
triple bottom breakdown. The current bearish vertical count is
$50, but if the risk problems continue to mount, that goal may be
conservative. We will be looking to go short at the current
level. This trade is a somewhat volatile one, and not for the
faint of heart. However, there are several scenarios for more
conservative traders, as well. OI sees either a trade of $60, or
a close below $61.50 as additional trigger points. If the market
gets a bounce after today's big drop, a failed rally under $65
would also provide an ideal entry point. We will use a stop loss
of $65, as well. Although this may seem to give us a lot of room
to the upside on a short play, we feel the current volatility in
the stock justifies such a range.
BUY PUT OCT-65 FNM-VM*OI= 5697 at $5.30 SL=2.50
BUY PUT NOV-60 FNM-WL OI= 575 at $4.20 SL=2.00
Average Daily Volume = 4.95 mil
---
KSS - Kohls Stores - $64.09 -3.20 (-5.46 for the week)
Company Summary:
Based in Menomonee Falls, Wis., Kohl's is a family-focused,
value-oriented specialty department store offering moderately
priced national brand apparel, shoes, accessories and home
products. The company operates 420 stores in 32 states.
Why We Like It:
Kohl's has suffered the same fate as its brethren in the retail
business. There has been a sales slowdown in the month of
September after Wal-Mart and Federated had previously reported
sales to be on track with guidance. For the last several months,
retailers have guided downward as each month has worn on, and
this month looks to be more of the same. The biggest problem
with retail sales still being slow is that the holiday shopping
season is just around the corner. If the trend toward lower
consumer spending does not turn around, the effects will be felt
much more severely in the next few months. Most retailers derive
an inordinate portion of their revenue from sales in the last
couple of months of the year. Therefore, without signs of an
economic turnaround any time soon, it may be a year before they
have a chance to recoup this year's losses.
KSS had flirted with support at $65 since the beginning of
August. It also had been on a series of higher highs and higher
lows, making shorts a bet against the tide. That pattern has
reversed itself in what appears to be a double top formation on
the daily chart. The stock recently broke down below its 10, 50,
100 and 200 dmas, after setting the second lower top. The
breakdown below $66 led to a new double bottom point and figure
sell signal and the intraday trade of $64 placed the stock right
on top of its bullish support line. A trade of $63 would
constitute a break in bullish support and can be used as a
trigger point for more conservative traders. We like the trade
below $65 as a signal to short the stock, and will initiate the
position here. Today saw a big drop in the stock, as well as the
Dow, so a "dead cat bounce" is a possibility on Monday. If the
market does bounce, a failed rally below $66, the point of
previous PnF support, may provide an additional entry point as
well. The current bearish vertical count is $52, but that could
wind up even lower, as the current column of "O"s is defining
that count. Our initial target on the play will be the PnF
support level of $57, however, if consumer spending does not
improve, we may let the position ride if it reaches that level.
Place stops at $67, above today's high.
BUY PUT OCT-65 KSS-VM*OI= 4558 at $3.50 SL=1.75
BUY PUT NOV-65 KSS-WM OI= 1240 at $4.80 SL=2.50
Average Daily Volume = 10.1 mil
---
FDX " FedEx Corporation $50.45 (+2.70 last week)
Company Summary:
FedEx Corporation is a global provider of transportation,
e-commerce and supply chain management services. Services
offered by FedEx companies, through over 215,000 employees and
contractors, include worldwide express delivery, ground
small-parcel delivery, less-than-truckload freight delivery,
supply chain management, customs brokerage, and trade
facilitation and commerce solutions.
Why We Like It:
Last week's brief rally attempt helped drag the Transports
($TRAN) up for a couple nice days of gains. But like so many
prior attempts in recent months, this one was doomed to failure,
right at the 50-dma ($2275). With the broad market weak on
Friday, the sector was already under pressure and then came the
earnings warning from DAL. While this wasn't unexpected, it did
further pressure the overall group. We played the downside in
shares of FDX in mid-September ahead of the company's earnings
report, and it looks like it is time for a repeat performance.
FDX handily beat estimates on September 19th and after reaffirming
estimates for 2002 and 2003, the stock shot significantly higher
in the intervening time. But that momentum seems to have waned,
as the stock reversed sharply from its 200-dma on Friday, losing
nearly 3%. This is clearly a higher-risk play, as we're trying
to pick a top in the stock. But with the overall market looking
to be headed south and the knowledge that shipping volumes are
falling, it appears that the odds are in our favor. With major
resistance overhead in the $52.50-53.00 area, and daily
Stochastics just beginning to roll over in overbought territory,
risk appears easy to manage here with a $53 stop. Use a rally
failure below the 200-dma to initiate new positions, or else wait
for a decline under the $50 level. Confirm continued weakness
in the $TRAN before entry.
BUY PUT OCT-55 FDX-VK OI= 600 at $4.90 SL=3.00
BUY PUT OCT-50*FDX-VJ OI=2048 at $1.65 SL=0.75
BUY PUT OCT-45 FDX-VI OI=4697 at $0.50 SL=0.25
Average Daily Volume = 1.84 mln
---
SPC - The St. Paul Companies, Inc. $28.79 (-0.87 last week)
Company Summary:
SPC is an insurance organization, based in the United States.
The company is a management company principally engaged, through
its subsidiaries, in providing commercial property-liability
insurance and non-life reinsurance products and services
worldwide. SPC also has a presence in the asset management
industry through its 77% majority ownership of The John Nuveen
Company. As a management company, SPC oversees the operations
of its subsidiaries and provides them with capital, management
and administrative services.
Why We Like It:
Beginning with the recent downgrade by Fitch of a basketful of
life insurance stocks, the entire Insurance sector (IUX.X) has
been having a rough go of things lately. Sure there was a bit
of artificial buying to prop up the group in the middle of last
week, but that fell apart on Friday, with the IUX sliding 3.74%
by the close. That got us to looking at some of the weaker
Insurance stocks, one of which appears to be SPC. While it
hasn't broken down yet, it appears that selling pressure in the
overall sector as well as the broad market will accomplish that
for us. Note the stock's loss of more than 5% on Friday? That
dropped SPC back to just above the $28 support level, but the
more important level is $27. When SPC prints $27, it will put
the PnF chart back on a Sell signal, opening the door for a
decline all the way to the $20 level. Until we get that
confirmation though, we need to play cautiously. Failed rallies
below the $30 level should make for solid entries into the play,
but those waiting for confirmation will want to see SPC drop
below $27 before initiating new positions, ideally with the IUX
index falling back under the $236 level that provided support
last week. Due to the tenuous nature of this play (at least
until we get that breakdown), we are setting our stop tight at
$31.
BUY PUT OCT-30*SPC-VF OI=176 at $2.10 SL=1.00
BUY PUT OCT-25 SPC-VE OI=101 at $0.40 SL=0.00
Average Daily Volume = 2.12 mln
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The Option Investor Newsletter Sunday 09-29-2002
Sunday 4 of 5
In Section Four:
Current Put Plays: BSC, CI, GM, TECD
Leaps: (See Note)
Traders Corner: If At First You Don’t Succeed... At Least Learn
Something!
Traders Corner: Title Here
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CURRENT PUT PLAYS
*****************
BSC - Bear Stearns - $56.46 -1.46 (-1.26 for the week)
Company Summary:
Founded in 1923, The Bear Stearns Companies Inc. is the parent
company of Bear, Stearns & Co. Inc., a leading investment banking
and securities trading and brokerage firm serving governments,
corporations, institutions and individuals worldwide. With
approximately $29.6 billion in total capital, the company's
business includes corporate finance and mergers and acquisitions,
institutional equities and fixed income sales, trading and
research, private client services, derivatives, foreign exchange
and futures sales and trading, asset management and custody
services. Through Bear, Stearns Securities Corp., it offers prime
broker and broker dealer clearing services, including clearing
and securities lending. Headquartered in New York City, the
company has approximately 10,500 employees worldwide.
Why We Like It:
BSC $56.46 Bear Stearns rebounded with the rest of the brokers
as the Dow surged on Wednesday and Thursday. It approached our
stop loss of $59, which was the top of its current descending
channel, and promptly rolled over. While the sector got a break
from the recent sell-off, it didn't last long. The problems in
the sector haven't changed. A sagging market has all but put a
stop to IPOs and investment banking revenues are down
significantly. Merger and acquisition activity has declined 44%
from the $247 billion worth of deals in the third quarter of
2001. Year to date deal volume has seen a similar decline.
Investors have pulled their money out of the market at a record
pace. August saw "only" a $5 billion drain on stock funds, after
July's record $50 billion. That $5 billion came out during a
month when the market was up, the first time that has happened in
14 years. After the September swoon, those numbers should get
even worse. Trading revenues are down for the sector, leading to
a big earnings warning from J.P. Morgan and Lehman Brothers
missing estimates. All bear markets have some bounces on the way
down and Wednesday and Thursday's gains appear to be just that.
The Securities Broker Dealer Index (XBD.X), which finished the
day down 13.94 to close at 366.34, rolled over below its 50-dma
to continue its series of lower highs and lower lows. It has not
yet reached the intraday lows it saw in July and August (330-
340), but with the Dow and Nasdaq both below those levels, it
probably won't be long. New entries in BSC can look for a trade
below $55 for signs of a continuing breakdown, or a possible
rollover on a rally below $59.
BUY PUT OCT-60 BSC-VL OI= 5231 at $4.60 SL=2.30
BUY PUT OCT-55 BSC-VK OI= 2757 at $1.95 SL=1.00
Average Daily Volume = 1.22 mil
---
CI - CIGNA Corporation $71.96 (-0.81 last week)
Company Summary:
CIGNA is an employee benefits organization in the United States.
The company and its subsidiaries are major providers of employee
benefits offered through the workplace, including healthcare
products and services, group life, accident and disability
insurance, retirement products and services and investment
management.
Why We Like It:
After a couple days of end-of-quarter buying, the broad markets
took another big tumble on Friday, wiping out most of the
intra-week gains. Just as Financials and Insurance stocks led
the way higher on Wednesday and Thursday, they led on the way
back down on Friday. After pushing up near the $250 level at the
close on Thursday, the Insurance index (IUX.X) did an about face,
losing 3.74% on Friday and coming to rest just above the $240
support level. CI caught our attention again last week after its
big breakdown under the $75 level, and just as expected, the stock
saw a bit of an oversold bounce from the $71 level. But it didn't
last long as, the sellers were back in control on Friday, driving
the stock back down to the $72 level and erasing all of Thursday's
gains. Traders that took advantage of the double-top near $74.50
on Friday are looking good right here ahead of a probable
breakdown on Monday. While we might get one more bounce before
the end of the quarter, it is clear that the trend is down, both
for the stock and the sector. Look for another failed rally in
the $73-74 area to provide for attractive entries ahead of the
breakdown. Those preferring to enter after the violation of
support will need to look for a decline under $69.75 before
initiating new positions. Note that $69.86 was the intraday low
last November, and once below that level, should quickly fall to
next support near $65. Keep stops set at $76.
BUY PUT OCT-75 CI-VO OI=322 at $4.70 SL=2.75
BUY PUT OCT-70*CI-VN OI=632 at $2.35 SL=1.25
Average Daily Volume = 982 K
---
GM – General Motors $39.79 (-3.14 last week)
Company Summary:
Maintaining its position as the world's #1 maker of cars and
trucks, GM has managed to diversify its business so that it is
more than just a car company. Its automotive business
encompasses the Buick, Cadillac, Chevrolet, GMC, Oldsmobile,
Pontiac and Saturn brands, as well as others through its
affiliations with Suzuki, Saab, and Isuzu. Non-automotive
operations include Hughes Electronics (satellites,
communications), Allison Transmission (medium and heavy-duty
transmissions), and GM Locomotive (locomotives, diesel engines).
GM has successfully spun off Delphi Automotive Systems, the
world's #1 auto parts maker.
Why We Like It:
Sputter, sputter, stall. That's what happened to GM's attempted
rally on the heels of Wednesday's mildly positive comments about
the European division still targeting breakeven for 2003. With
negative comments surfacing about major companies on Thursday and
Friday, the bulls just didn't have the conviction going into the
weekend, as window dressing became window undressing. The DOW
slid back sharply on Friday, with only KO ending the day in the
green. After last Tuesday's dip to just above $38, the PnF
vertical count grew to $27. Without enough of a bounce to give a
3-box reversal, that target could actually fall further next
week. But first things first. GE ran out of steam right at the
10-dma ($41.83) on Thursday, and the continuous selling pressure
on Friday had the stock dropping under the $40 level in late
afternoon trade. It is hard to imagine what will motivate buyers
next week with the end-of-quarter buying coming to an end, and
evidence continuing to mount that the consumer is losing interest
in going further into debt, even at zero percent. Use any brief
rally in the $41-42 area as an attractive entry into the play or
else wait for a breakdown under $39.50. We need to be careful
with momentum based entries in the $38-36.50 region as there is
significant historical support here dating back to 1993-1995.
Keep stops set at $43.50.
BUY PUT OCT-40*GM-VH OI=7471 at $2.60 SL=1.25
BUY PUT OCT-37 GM-VU OI=3066 at $1.70 SL=0.75
Average Daily Volume = 5.34 mln
---
TECD – Tech Data Corporation $27.25 (-3.46 last week)
Company Summary:
Tech Data Corporation is a provider and distributor of
information technology products, logistics management and other
value-added services. The company distributes microcomputer
hardware and software products to value-added resellers, direct
marketers, retailers corporate resellers and Internet resellers.
TECD and its subsidiaries distribute to more than 80 countries
and serve over 100,000 resellers in the United States, Canada,
the Caribbean, Latin America, Europe and the Middle East. The
company's broad assortment of vendors and products meets the
customers' need for a cost-effective link to those products
through a single source.
Why We Like It:
So much for getting a dead-cat bounce for an entry. Following
its breakdown under the $30 level, TECD had the odds stacked
against it going into the weekend. Add in the heavy selling
pressure that materialized in the broader market, and the stock
never had a chance. After a brief push up to just below $29 early
in the day, it was all downhill from there, with TECD shedding
another 4% on the day to close just above $27, and looking like
our initial $25 target is a sure thing. We now have to go all
the way back to April of 2001 to find any support under current
levels. That support is staggered between $27, and the
January-2001 low at $25. A drop near that level will make for a
good opportunity to harvest at least partial gains on the play,
as it will more than likely get at least a mild bounce from there.
Because of the support between here and $25, we want to look for
the next failed rally to enter new positions. A mild rebound
could give us an entry near $28, but the better entry would come
from a rollover near the $29 level, which now appears to be
significant resistance. Lower stops to $30 this weekend.
BUY PUT OCT-30 TDQ-VF OI=1047 at $3.70 SL=2.25
BUY PUT OCT-25*TDQ-VE OI= 161 at $1.35 SL=0.75
Average Daily Volume = 718 K
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*****
LEAPS
*****
Due to technical difficulties, LEAPS will be posted on Monday
**************
TRADERS CORNER
**************
If At First You Don’t Succeed... At Least Learn Something!
By Mike Parnos, Investing With Attitude
Between Liz Taylor and Mickey Rooney there were more than 12
failed marriages. They’re probably not done yet. What do
repeated failures tell you? How many times do people have to
repeat a pattern and suffer the consequences before they stop
that behavior? Believe me. It’s amazing how good it feels when
you stop banging your head against the wall.
Couch Potato Trading Institute students are taught reality in the
form of disciplined trading. The realities of life are harsh,
but they have to be dealt with. If you ignore them, you pretty
much deserve whatever happens. Hence the saying, “Fool me once,
shame on you. Fool me twice, shame on me.”
_____________________________________________________________
Mike,
Six months ago I sold a strangle. I planned to wait to option
expiration benefiting from premium decay, not knowing a better
time to exit the position. When is the best time to close the
position (any strangle) if your opinion on the stock does not
change despite the swings in the stock and in the market?
The position has had both paper profits and losses. I plan to
let the calls expire worthless and would like to continue to sell
puts and potentially benefit from future decay in time value.
Also selling the call side for another strangle is an option.
There is no significant time value premium remaining now so there
is a disadvantage to remain in the same position and not entering
into another where there is time value decay.
The question is what are worthwhile reward/risk strategies for
follow up action on the puts when they become deep in the money?
I remain optimistic on the stock, but believe that all stocks may
suffer from deflated PE ratios if the July lows or 1997 - 1999
lows are tested. I am not married to this stock and am willing
to close the position at a loss. Losses are potentially more
acceptable if one learns from them and has better strategies in
the future!!!!!!!
IDPH -- Sold Strangle:
20 October $75 calls at $5.30 & 20 October $55 puts at $7.10,
Total premium received: $24,800
Response:
I consider exiting a position once the position achieved about
75% of the target profit – and there is still a significant
amount of time remaining before expiration. In the 6-month
position you describe, you’re aiming for a profit of $12.40. If
I could buy back the two short positions for $3.10 with two or
more months to go, I’d jump at it. It’s not worth the additional
two months of exposure for the $3.10. Unfortunately, IDPH didn’t
cooperate.
When this response was written, IDPH was trading at $37.71. It’s
a pretty good bet that the October $75 calls will expire
worthless. IDPH would have to more than double in less than a
month for you to be concerned. You can buy them back at $.05 if
you’re concerned.
The October $55 puts are $17.29 in the money. The longer you
hold them, the more risk you have of being assigned the stock
prior to expiration. Right now, to buy them back, would cost you
$17.50. That’s only $.21 of time value. Stranger things have
happened. Do you want to own 2,000 shares of IDPH? I don’t
think you do.
Now I’m going to scold you. You didn’t have a plan when you
entered the trade. Any _______ (you fill in the blank) can sell a
put or a call. But, the CPTI credo tells you – mierde happens.
You have to know when to hold em and know when to fold em –
before you ever hit the “buy” or “sell” button. If you don’t
know how to cover your ass-ets, don’t moon the market.
IDPH recently broke below its 30-day moving average. You may be
positive on the stock, but do you think it’s going to magically
reverse trend and regain over $17 of value? That’s almost a 50%
increase from current levels.
What can you do? Fortunately, you said you’re not married to the
stock. Apparently, you’re not married to your money either.
How can you stop the bleeding? You wrote that you took in
$24,800. At this level, it would cost you $35,000 ($17.50 x
2,000) to buy back your 20 contracts of the $55 IDPH puts.
That’s a $10,200 haircut and lesson.
Do you think you have a better chance of making back the loss in
IDPH or with another vehicle? If you truly believe in IDPH
(along with the Easter Bunny), you could buy some insurance in
the form of a November $35 put for $3.50. That would cost $7,000
($3.50 x 20 contracts), but it will protect you on any loss below
$35 and give IDPH two more months to move back up.
If, when IDPH broke below $55, you shorted 2,000 shares of stock,
you could have nipped the problem in the bud.
You may want to review my past columns in Option 101 and Traders
Corner in which we have tracked a hypothetical Iron Condor trade
of BBH. That is not too unlike a sell straddle and the choices
of action when a strike price is violated are similar.
Mike,
For the IDPH strangle I was thinking of letting the calls expire
and buying the puts at a loss and making up the loss by rolling
into another option contract: I would buy the 20 October $55
puts IDKVK at 17 paying 34,000 manifesting a 10,000 loss and
selling 100 January 20 puts IDKMD at 1. I could sell many more
than 100 if this a good investment to try to convert the
loss beyond a neutral carry forward roll into a profit? Should
IDPH be higher than $20 on January expiration, I would then
convert the carry forward loss into no loss.
If I sell the January $65 IDPH calls at $.35 to make another
strangle, the return would be an additional $3,500.
Response:
You certainly can roll your puts from 20 October contracts to 100
January contracts and that would make up your loss. Being $18
out of the money, your chances are pretty good. You are
dramatically increasing your exposure and you are tying up a
bunch of margin for about four months. If the size of your
account can handle it, then you're in better shape than most.
Your selling the calls is a good idea too. I'd consider selling
the $22.50 puts instead of the Jan. 20s. They're selling for
$1.40 and then sell the $60 January calls for $.70. That way you
can take in a total of $2.10 and would have to sell only about 50
contracts of each instead of 100 of each and IDPH could trade
between $22.50 and $60. That’s a nice big comfort zone. Your
exposure would be significantly less.
Another Alternative:
If you continue to be neutral to bearish on IDPH, you might want
to sell the calls one or two months out, at slightly lower
strikes, to generate a little more income while you’re waiting
for January expiration. For instance, you could have picked up
about $.60 for the November $55 calls. IDPH hasn’t traded
anywhere near $55 since April, so your chances of the Nov. $55
calls are excellent. Then, at Nov. expiration, you could sell
the January $55 calls for another $.60. Obviously, the strike
that you sell in January could be adjusted up or down depending
on where IDPH was trading.
The point is, that by selling the near term calls instead of the
January calls, you could conceivably take in a total of $1.20 on
the short calls. If you only sold the January calls, you would
have brought in only $.70. That extra $.50 x 100 contracts is
$5,000. That’s a down payment on your new Rolls.
______________________________________________________________
Mike,
I closed half my straddle position on Q's last week (Oct $26
Puts) and have a cost basis of $.15 in the Oct $24 Calls. I am
still long the Oct $25Puts and $23Calls . I need another $.60
cents out of the $25P's to cover the cost of the entire position.
Response:
So you now are rooting for the QQQs to go up so your Oct. $24
calls will appreciate. At the same time, you want the QQQs to go
down so you can sell your Oct. $25 puts and then be long the $23
calls. When the QQQs dipped below $20 recently, didn't that give
you a chance to liquidate the $25 puts at a good price? That
would have left you with both the $23 and $24 long October calls
and you could be rooting for only one direction -- long.
_____________________________________________________________
Iron Condor Update:
BBH finished this week at $79.59. We got bounced around plenty
this week. We thought BBH had finally picked a direction – down.
But it made up ground and touched $81.99 today (Friday). So,
once again we’re short the 1,000 shares. Our profit is intact
(less a few more commissions). Life goes on.
______________________________________________________________
Happy trading! Remember the CPTI credo: May our remote
batteries and self-discipline last forever, but mierde happens.
Be prepared! In trading, as in life, it’s not the cards we’re
dealt. It’s how we play them.
Your questions and comments are always welcome.
mparnos@OptionInvestor.com
**************
TRADERS CORNER
**************
Chart Gaps: At Trend Reversal Tops & Bottoms -
By Leigh Stevens
leighstevens@mindspring.com
As I indicated in my earlier Trader’s Corner article – 9/26 at:
http://www.OptionInvestor.com/traderscorner/092602_2.asp
“common” chart gaps occur frequently enough so that you may stop
noticing them after a while, as highlighted on the chart below –
Circles are drawn around most of the “common” gaps in the chart
above and as you can see, they are quite numerous - at least for
this stock during the period shown.
The sometimes numerous nature of gaps should not obscure the
important pattern information provided by gaps. Sometime, after
there is a trend already established, a stronger, more
accelerated move begins and a bigger gap may occur that qualifies
as a breakaway gap – this is showing that one side or the other
(buyers or sellers) is now more firmly in control. There may be
more chart gaps seen around the early part of a trend phase that
has accelerating momentum either up or down.
Accelerating momentum refers to prices going up or down at a
faster and faster rate; e.g., a stock were going up about 10% a
year, but along comes a year or years where it starts averaging a
20% year over year gain. Or the stock or an index starts falling
at an increasing rate – chart gaps often develop at these
junctures and a often of the breakaway type gap when trends go
from up to down or vice versa.
Looking at downside moves and the periods where prices accelerate
downward at a faster and faster rate, the nature of bear markets
is such that they can tend toward steeper losses, in percentage
terms, in a shorter time span than bull markets.
Bear markets are much compressed in terms of time. In terms of
price, a bear market may not go down much more than a bull market
goes up, but it will do it faster most times. I would have to say
that the current bear market is drawn out much longer however
than the typical 18 month average.
After the trend is moderately to well-developed, there may again
be a bigger price gap or gaps that could qualify as the “runaway”
variety such as in the chart below. The trend shown in the chart
begins (the trend reversal) with an “exhaustion” gap which I will
describe a bit further on in this Trader’s Corner article –
Gaps at this “middle” stage are important, as it suggests in
stocks anyway, that a second wave of possible new sellers (or
buyers, in the case of upside runaway/measuring gaps) are coming
in and are more convinced about the staying power of the trend.
In the case of the bear trend shown above, we could say that
investors who were convinced that the stock would come back are
now more discouraged about the prospects for an earnings
recovery, etc. and now exit the stock.
In fact, the runaway or “measuring” gap often is brought about by
an earnings release that is confirming a deeper slide for the
company – in the case of an index it is a deeper slide in the
overall economy.
In stocks in a bull trend, traders and investors are reacting to
news that is increasing favorable to an uptrend – enough so that
they are willing to pay up for the stocks they’re interested in
and this includes willingness to pay up for an opening where
prices gap higher. Action in individual stocks may be part of a
general market upswing.
The overall up volume numbers published by the exchanges will
start to surge on days with the kind of big moves where gaps are
also often occurring. The willingness is buy on up ticks is what
is shown in the up volume numbers. Gaps come from this kind of
thrust, a result of increasing bullish sentiment.
EXAUSTION GAPS –
The exhaustion gap, which tends to be even more common in the
futures markets, occurs only after a trend has been underway for
some time. It typically stems from a final last burst of buying
or selling activity that “exhausts” the participants or depletes
their accounts.
Sometimes, the action that follows such a exhaustion gap is
another gap in the opposite direction that leaves a single bar or
cluster of bars isolated, with gaps before and after, that lead
to the further description of this pattern as an island formation
or island reversal pattern.
Without subsequent price action that suggests a top or bottom is
forming, an exhaustion gap would initially be hard to distinguish
from a common or runaway gap. This type gap is the most likely
to “signal” a trend reversal, especially in conjunction with a
subsequent gap that forms an island pattern as in my next chart –
ISLAND REVERSALS –
The chart above is an example of an island top – an island bottom
is a formation where prices gap lower after an extended downtrend
(an exhaustion gap), then trade for one or more days below the
low end of the gap, leaving the chart space of the gap open.
This activity is followed by a gap higher that again leaves open
space above the single bar or cluster of bars and results in the
appearance of an island formation that is underneath the
subsequent uptrend – in stocks the island type formation is a
little more “irregular” than in commodities, as is provided by
the example in the chart below –
The more “pure type” island bottoms and tops tend to be a feature
in the futures markets, but there are many island/gap patterns
that are seen in stocks, especially the more volatile ones –
however in stocks, a looser interpretation is required for these
formations.
One key to a true island top or bottom is that they need appear
near the top of an uptrend or the bottom of a downtrend, as
proven by subsequent market action. The best strategy before
concluding that an island top or bottom reversal pattern has
formed is to wait a few days to see if the gap or gaps created
during the island reversal formation, get “filled in” –
If a gap or gaps remain after a period of 2-3 days to 2-3 weeks,
the probability of there being a final top or bottom in place
increases substantially. In stocks, you also see these reversals
occurring on the way down or way up, rather than at the closer to
the absolute highs or lows, more often than in other markets –
An island top is the opposite of the island bottom and occurs
when prices gap higher (an exhaustion gap) after an uptrend has
been underway for some time, then trade for one day or for
several days where the lows remain above the gap, leaving this
space completely “open”.
This price action is then followed by a gap down that results in
open space below the single bar or bars or there will be gaps on
either side of the cluster of bars making the formation resemble
an “island” as in the next chart -
A new trend begins from a area of the island top, making this a
reversal pattern. The island top is typically left intact and
prices do not fill in the gap(s) that created the isolated
bar(s), at least during the duration of the trend that follows
over the next weeks. Months or years later of course, the gaps
may “filled in”.
At the end of the current bear market, “exhaustion” gaps and
island bottom formations is definitely something to look for as
the beginning stages of a market reversal.
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The Option Investor Newsletter Sunday 09-29-2002
Sunday 5 of 5
In Section Five:
Covered Calls: Trading Basics: Are Covered-Calls Right For You?
Naked Puts: Options 101: Terms and Definitions
Spreads/Straddles/Combos: Another One-Day Wonder!
Updated In The Site Tonight:
Market Watch
Market Posture
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COVERED CALLS
*************
Trading Basics: Are Covered-Calls Right For You?
By Mark Wnetrzak
One of our readers asked for some information on the historical
success of this section and the suitability of the covered-call
strategy for new investors.
Attn: Questions@OptionInvestor.com
Subject: Option Trading Strategies
Hello,
I've been getting the Option-investor newsletter on a free trial
basis and after looking through the different sections, it seems
that one of the most conservative strategies you promote is the
sale of "covered" calls.
I know that covered calls involve buying stock and selling calls
against it to collect a small income, but what I have noticed in
your approach is that you end up selling the stock for less than
you paid for it.
I assume the loss is offset by the money from the sold call but
can you really be profitable in the long run by severely limiting
your upside potential? I guess a better question would be, how
successful have you been with this method? I'm just trying to
decide if it is right for me, since I own a number of different
stocks, or if I should search for another conservative strategy.
Thank You,
RD
Regarding our approach to covered-calls:
Our primary goal in this section is to provide positions that make
acceptable returns while still receiving an above-average amount of
downside protection. We use a simple approach to uncover a variety
of covered-call candidates to supplement your search for profitable
trading plays: technical scans and option sorts. I personally scan
through hundreds of charts each week looking for technically strong
stocks with favorable call-option premiums. I then sort through
several "over-priced" option lists, looking for stocks with favor-
able technicals. The strategy we use in selecting these positions
is based on a conservative covered-write using the "total return"
concept that Lawrence McMillan adeptly describes in his original
book, "Options: As a Strategic Investment." With this conservative
approach, an investor considers the covered write as a single entity
and is not interested so much in stock ownership or bullish movement,
but in obtaining a consistent (monthly) return on investment. Based
on this approach, our target is generally in the range of 3%-6% per
month (6%-12% on margin), and in all but a few cases, the stock is
called away or sold after one strike period. Of course, it is still
good advice not to purchase an issue you wouldn't mind owning, as
there is always that possibility with a covered-write. We favor a
short-term approach, which isn't predicated on forecasting a stock's
(or the market's) directional movement. Still, whether the covered
write strategy is applied short-term or longer term, it requires a
neutral to slightly bullish outlook on the underlying equity and the
overall market. Obviously, covered-calls do hedge against downside
movement, but they are not a remedy for protracted bearish activity.
We prefer the higher probability of making a consistent, low return
but some investors prefer to strive for higher potential returns with
an aggressive outlook, writing "out-of-the-money" calls on stocks in
their portfolios. These (OTM) positions offer greater rewards but
also have less downside protection. The maximum potential profit of
an OTM position, while greater than that of an "in-the-money" (ITM)
position, will always require an increase in price by the underlying
stock. Thus, by utilizing an OTM option, the success of the overall
position depends more on the movement of the stock price and less on
the benefits of writing the call. Since the premium generated from
the sale of the call is much smaller, the overall position will be
more susceptible to loss if the stock's price declines. ITM plays
are plainly more conservative, offering less risk but also smaller
reward potential. Though our strategy is less aggressive, there is
risk of loss in all trading.
As far as the success of this section, the percentage of winning
plays, with minimum target returns above 8% per month (on margin),
averages around 75%, depending on the character of the market. On
some occasions, we have enjoyed perfect results with no losers in
a specific expiration period. At other times, during extremely
bearish months, we have labored to achieve a 50% success rate.
But, there are some things that these statistics don't reveal.
One, we offer the same number of plays each week, regardless of
whether the market is conducive to a bullish strategy, which in
many cases recently, it is not. Another important fact is that
one or two catastrophic losers can (and historically do) greatly
affect the annualized return for this type of strategy. There are
also a few problems that new investors encounter when using this
strategy (mostly related to the human emotions of hope, greed and
fear) and one of them is that you won't get rich quick. Sadly,
that effect can alter the performance of this technique because
after you have a few winning plays, the desire to achieve slightly
better returns becomes almost overwhelming. And, after that first
big loser (that you fail to close because "it can't go much lower"
etc.) eliminates most of your gains, it's easy to change and look
for something more exciting and (potentially?) profitable. For
those of us who think we know the game, it is really a very hard
way to participate in the options market. You almost have to be
less experienced to succeed in this manner -- trading strategies
based on a high probability of limited return -- because most us
will simply not limit the losses to that which is required to be
profitable in the long run (most experienced players try to trade
out of the losing play or "double-down" and so on). Option guru
Lawrence McMillan noted years ago that on average, the technique
yields 3-6% monthly (annualized 36% not on margin) returns yet
it is not among his favored strategies because it requires tedious
amounts of mental stamina to manage correctly. The incredibly
small profits simply require that you have very few "preventable"
losers. Of course, a few of the losses are not preventable,
however those have always been averaged into the overall return.
So, it really comes down to your ability as a trader and how you
exit or adjust positions without emotion. It isn't easy and many
people become discouraged if they are undisciplined. There isn't
any free money and a technique that allows one loser to cancel a
number of winners is just not for everyone.
Trade Wisely!
SUMMARY OF PREVIOUS CANDIDATES
*****
Note: Margin not used in calculations.
Stock Price Last Call Strike Price Gain Potential
Symbol Picked Price Month Sold Picked /Loss Mon. Yield
CRY 2.94 2.74 OCT 2.50 0.75 *$ 0.31 15.4%
AES 2.92 2.46 OCT 2.50 0.75 $ 0.29 14.5%
OSTE 9.45 9.47 OCT 7.50 2.50 *$ 0.55 5.7%
GNSS 8.73 7.59 OCT 7.50 1.60 *$ 0.37 5.6%
CVC 9.48 9.94 OCT 7.50 2.50 *$ 0.52 5.4%
RSTO 5.70 4.77 OCT 5.00 1.20 $ 0.27 5.2%
QCOM 28.08 28.61 OCT 25.00 4.20 *$ 1.12 5.1%
BSTE 29.40 28.42 OCT 25.00 5.70 *$ 1.30 4.8%
NOK 13.95 13.70 OCT 12.50 2.20 *$ 0.75 4.6%
NWRE 15.97 13.75 OCT 12.50 4.10 *$ 0.63 4.6%
PPD 21.80 20.24 OCT 17.50 5.00 *$ 0.70 4.5%
FLE 6.02 6.61 OCT 5.00 1.30 *$ 0.28 4.3%
CMLS 16.85 17.58 OCT 15.00 2.55 *$ 0.70 4.3%
UDI 22.58 24.25 OCT 20.00 3.30 *$ 0.72 4.1%
PRX 28.20 28.20 OCT 25.00 4.30 *$ 1.10 4.0%
LMNX 7.53 6.93 OCT 7.50 0.60 $ 0.00 0.0%
MACR 8.49 7.02 OCT 7.50 1.45 $ -0.02 0.0%
*$ = Stock price is above the sold striking price.
Comments:
The dark shadow of "October" cools the bullish heat once again
as the end-of-quarter mark-up is washed away. That sounds
better than saying we're still in a bearish environment and
October tends to be a bearish month. The horrid ending to
this week is lending little credence to the double-bottom
theorists. Once the markets establish a fairly long lateral
base, then I'll listen to the bullish case! Ok, enough cliche's.
The covered-call portfolio is holding up relatively well in
this adverse climate. Neoware Systems' (NASDAQ:NWRE) correction
is holding above its 150-dma and the technicals remain bullish.
Luminex (NASDAQ:LMNX) stopped right at $6.50 mid-week but needs
to move above $7.50 to move out of danger. Restoration Hardware
(NASDAQ:RSTO) dropped fairly quickly early this week and anyone
who decided to enter the position should have a much better cost
basis than shown here. Moving below $4.00 (closing basis) will
be an exit signal for this portfolio. Pre-Paid Legal Services
(NYSE:PPD) could come under some pressure soon and should be
monitored closely. Friday's heavy volume is a bit unsettling.
Still, most of the stocks listed above remain in lateral trends
and above technical support. Remember, lost opportunity is
easier made-up than lost capital.
Note: Conexant Systems (NASDAQ:CNXT) will not be posted in the
portfolio summary as the additional stock purchase requirements,
due to the past merger of a business unit with Alpha Industries
(NASDAQ:AHAA), altered the components of the published position.
This information was not discovered until after the publishing
deadline. The new contract specifications for CZI options can
be found here
NEW CANDIDATES
*********
Sequenced by Company
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
ISIS 9.15 OCT 7.50 QIS JU 1.95 347 7.20 21 6.0%
KDE 23.39 OCT 22.50 KDE JX 1.55 180 21.84 21 4.4%
NWRE 13.75 OCT 12.50 QQA JV 1.90 201 11.85 21 7.9%
PLMD 26.25 OCT 25.00 PM JE 2.35 1232 23.90 21 6.7%
RTIX 8.00 OCT 7.50 RQK JU 0.75 60 7.25 21 5.0%
SYMC 34.30 OCT 30.00 SYQ JF 5.20 2052 29.10 21 4.5%
UTSI 16.25 OCT 15.00 UON JC 1.80 3081 14.45 21 5.5%
Sequenced by Target Yield (monthly basis)
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
NWRE 13.75 OCT 12.50 QQA JV 1.90 201 11.85 21 7.9%
PLMD 26.25 OCT 25.00 PM JE 2.35 1232 23.90 21 6.7%
ISIS 9.15 OCT 7.50 QIS JU 1.95 347 7.20 21 6.0%
UTSI 16.25 OCT 15.00 UON JC 1.80 3081 14.45 21 5.5%
RTIX 8.00 OCT 7.50 RQK JU 0.75 60 7.25 21 5.0%
SYMC 34.30 OCT 30.00 SYQ JF 5.20 2052 29.10 21 4.5%
KDE 23.39 OCT 22.50 KDE JX 1.55 180 21.84 21 4.4%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).
*****
ISIS - ISIS Pharmaceuticals $9.15 *** Building A Base ***
ISIS Pharmaceuticals (NASDAQ:ISIS) is a biopharmaceutical company
focused on delivering RNA-based drug discovery technologies to
identify and commercialize novel drugs to treat diseases. The
company has a strong proprietary position in RNA-based drug
discovery technologies. With its primary technology, antisense,
ISIS creates inhibitors designed to bind with high specificity
to their RNA target and modulate protein production. With its
Ibis technology, the company uses its discoveries in RNA to
design small-molecule therapeutics that bind to RNA. ISIS also
uses its antisense technology in collaborations with other
companies to identify and prioritize attractive gene targets
for their drug discovery programs. ISIS has been forging a
Stage I base over the last few months in an old historical
trading range. We simply favor the recent technical trend and
this position offers a great way to speculate on the future
movement of the issue in a conservative manner.
OCT 7.50 QIS JU LB=1.95 OI=347 CB=7.20 DE=21 TY=6.0%
*****
KDE - 4Kids Entertainment $23.39 *** Breaking Out! ***
4Kids Entertainment (NYSE:KDE) is a children's entertainment
company. The company acquires, with representation agreements,
intellectual property rights to children's properties from
around the world. Through its subsidiaries, the company seeks
to maximize the economic returns on the properties through TV
production and distribution and merchandise licensing. 4Kids
also provides media buying/planning, toy design/development,
and Website development. The company operates through five
wholly owned subsidiaries: 4Kids Entertainment Licensing, 4Kids
Entertainment International, The Summit Media Group, 4Kids
Productions, and Websites 4Kids. 4Kids' share price rallied
strongly this week on speculation that a new show, "Yu-Gi-Oh"
from Japan, could offer property rights bigger than Pokemon.
Technically, this unique issue appears to be successfully
completing a year-long consolidation phase and we expect the
share value to benefit significantly from the next market rally.
OCT 22.50 KDE JX LB=1.55 OI=180 CB=21.84 DE=21 TY=4.4%
*****
NWRE - Neoware Systems $13.75 *** Pullback = Entry Point? ***
Neoware Systems (NASDAQ:NWRE) provides software and solutions to
enable appliance computing, a web-based computing architecture
targeted at business customers that is designed to be simpler
and easier than traditional personal computer-based computing.
The company's software and management tools power and manage a
new generation of smart computing appliances that utilize the
benefits of open, industry-standard technologies to create new
alternatives to PCs used in business and a variety of proprietary
business devices. Neoware Systems provides its software on top
of a number of embedded operating systems, including Microsoft's
Windows CE and NT Embedded, as well as an embedded version of the
Linux operating system. The company reported sharply higher
revenue and earnings for its 4th-quarter and fiscal year ended
June 30, 2002. Neoware is gaining market share with growing
profitability, a strong balance sheet and no debt. Neoware has
been in "rally mode" since last November with the issue moving
from $2 to $18 in only 10 months and the recent consolidation
may be offering a second chance entry point. Investors looking
for a long-term portfolio holding can use this position to obtain
a low risk entry point in the issue.
OCT 12.50 QQA JV LB=1.90 OI=201 CB=11.85 DE=21 TY=7.9%
*****
PLMD - PolyMedica $26.25 *** Is The Bad News Priced-In? ***
PolyMedica (NASDAQ:PLMD) is a provider of direct-to-consumer
medical products and services, conducting business through its
Chronic Care, Professional Products and Consumer Healthcare
segments. The company sells diabetes supplies and products,
and provides services to Medicare-eligible seniors suffering
from diabetes and related chronic diseases through its Chronic
Care segment. Through its Professional Products segment, it
provides direct-to-consumer prescription respiratory supplies
and services to Medicare-eligible seniors suffering from chronic
obstructive pulmonary disease. It also markets, manufactures
and distributes a broad line of prescription urological and
suppository products. PolyMedica sells prescription oral
medications not covered by Medicare to its existing customers
through its Professional Products segment. PolyMedica is the
target of criminal and civil investigations by federal agencies,
including the U.S. Attorney's Office for the Southern District
of Florida, for alleged health-care fraud, improper revenue
recognition and obstruction of justice. The company recently
forecast second-quarter earnings between 62 cents and 66 cents
per share due to costs associated with the investigations.
Without the legal and related costs from the investigations,
the company forecast earnings between 82 cents to 84 cents per
share for the quarter, compared with 74 cents a year ago.
Based on the recent technicals, the bad news appears to be
already priced-in and this position offers speculators a
reasonable risk-reward profile for speculative investors.
OCT 25.00 PM JE LB=2.35 OI=1232 CB=23.90 DE=21 TY=6.7%
*****
RTIX - Regeneration Tech. $8.00 *** Breaking Out: Part II ***
Regeneration Technologies (NASDAQ:RTIX) is engaged in the use of
natural tissue and technologies to repair and promote the natural
healing of human bone and other human tissues. RTIX processes
human musculoskeletal and other tissue, including bone, cartilage,
tendon, ligament, pericardial and cardiovascular tissue in
producing its allografts. Surgeons then use these tissues to
repair and promote the healing of bone and other tissue defects,
including spinal vertebrae repair, musculoskeletal reconstruction,
fracture repair, repairs to the jaw and related tissues, urinary
incontinence and heart valve disorders. RTIX rallied sharply
this week after the company announced that it had finalized and
signed definitive agreements with Medtronic Sofamor Danek (NYSE:
MDT) and Exactech (NASDAQ:EXAC). We simply favor the bullish
move above the April high which suggests further upside potential.
Investors who agree can use this position to speculate on the
future movement of the issue in a conservative manner.
OCT 7.50 RQK JU LB=0.75 OI=60 CB=7.25 DE=21 TY=5.0%
*****
SYMC - Symantec $34.30 *** Trading Range ***
Symantec Corporation (NASDAQ:SYMC) provides a broad range of
content and network security software and appliance solutions to
enterprises, individuals and service providers. The company is
a provider of client, gateway and server security solutions
for virus protection, firewall and virtual private network,
vulnerability management, intrusion detection, Internet content
and e-mail filtering, remote management technologies and security
services to enterprises and service providers around the world.
Symantec views its business in five primary operating segments:
Enterprise Security, Enterprise Administration, Consumer Products,
Services and Other. Last week, J.P. Morgan Securities analyst
Sterling Auty shifted to a positive near-term outlook on Symantec
heading into the company's quarterly report next month. Shares
of Symantec moved to the top of a recent trading range on the news
and the technical support area near $30-$31 provides an excellent
margin of safety for traders who wish to speculate on its near-term
share value.
OCT 30.00 SYQ JF LB=5.20 OI=2052 CB=29.10 DE=21 TY=4.5%
*****
UTSI - UTStarcom $16.25 *** Historic Support Area ***
UTStarcom (NASDAQ:UTSI) designs, manufactures and markets wireline
and wireless broadband access and switching equipment that enables
migration to next generation Internet protocol (IP)-based networks.
Substantially all of UTSI's sales have been to service providers
in China, however, the company is expanding to markets outside of
China. UTSI's integrated suite of products provides migration to
next generation networks and allows service providers to offer
efficient and expandable voice, data and Internet access services.
UTStarcom stock has rallied sharply this week after news that the
company landed a contract to deploy its equipment in Southern China.
We simply favor the historic support area (two-year chart) near
our cost basis and this position offers a low risk entry point for
investors who wouldn't mind having UTStarcom in their long-term
stock portfolio.
OCT 15.00 UON JC LB=1.80 OI=3081 CB=14.45 DE=21 TY=5.5%
*****
*****************
SUPPLEMENTAL COVERED CALL CANDIDATES
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Target Yield (monthly basis)
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
TERN 2.51 OCT 2.50 TUN JZ 0.30 189 2.21 21 19.0%
CRY 2.74 OCT 2.50 CRY JZ 0.50 77 2.24 21 16.8%
CKFR 11.50 OCT 10.00 FCQ JB 1.95 33 9.55 21 6.8%
V 12.40 OCT 10.00 V JB 2.80 294 9.60 21 6.0%
MDCO 10.61 OCT 10.00 MQL JB 1.00 388 9.61 21 5.9%
VRTS 15.12 OCT 12.50 VIV JV 3.10 3994 12.02 21 5.8%
ISSX 12.72 OCT 10.00 ISU JB 3.10 5 9.62 21 5.7%
RFMD 6.37 OCT 5.00 RFZ JA 1.50 732 4.87 21 3.9%
*****************
NAKED PUT SECTION
*****************
Options 101: Terms and Definitions
By Ray Cummins
Some of our new readers have expressed a desire to learn more
about two concepts an option trader must understand to be
profitable on a consistent basis: volatility and probability.
Traders without knowledge of the way volatility and probability
affect option pricing and potential risk-reward have little
chance of surviving in the derivatives market. Volatility is
one of the most important factors in option trading because it
measures the amount by which the underlying asset fluctuates in
a given period of time. Before you can estimate the future
volatility of an issue, or the probability of the issue reaching
a certain price, you must understand how a stock's movement is
quantified from a statistical standpoint. Historical volatility
is calculated by using the standard deviation of an underlying
asset's price changes (from close of trading each day) for a
certain time period. In simple terms, the standard deviation is
basically the "mean of the mean," and it can often help you find
the story behind the historical data. To understand this unique
concept, you must learn about what statisticians call "normal"
distribution. A normal distribution of data means that most of
the examples in a set of data are close to the "average," while
relatively few examples tend to one extreme or the other. If
you depicted normally distributed data on a graph, it would look
something like this (the infamous bell-curve):
Normal Distribution Chart:
The x-axis (the horizontal one) is the value in question, and the
the y-axis (the vertical one) is the number of data points for
each value on the x-axis. Not all sets of data will have graphs
that look this perfect. Some will have relatively flat curves,
while others will be steeper. Sometimes the mean will lean a
bit to one side or the other. However, all normally distributed
data will have something like this same bell-curve shape. The
standard deviation is a statistic that tells you how tightly all
the various examples are clustered around the mean in a set of
data. When the examples are fairly tightly bunched together and
the bell-shaped curve is steep, the standard deviation is small.
When the examples are spread apart and the curve is relatively
flat, that suggests a relatively large standard deviation in the
data. Computing the value of a standard deviation is complicated
but here what a standard deviation represents graphically:
Standard Deviations Chart:
One standard deviation away from the mean in either direction on
the horizontal axis (the red area on the above graph) accounts for
somewhere around 68% of the possible outcomes in this group. Two
standard deviations away from the mean (the red and green areas)
account for roughly 95% of the outcomes. Three standard deviations
(the red, green and blue areas) account for about 99% of all the
possible outcomes. If this curve were flatter and more spread out,
the standard deviation would have to be larger in order to account
for the number of possible outcomes. That is why the standard
deviation can tell you how spread out the results in a set are
from the mean.
Without going into a complex study of probability analysis, you can
use a simple probability calculator (or preferably, a "monte-carlo"
style calculator) to determine the likelihood of the issue trading
above or below a specific number or within a given profit range.
Of course, the fact that it "should" remain in a particular range
doesn't mean it will and that's the reason traders have to learn to
manage losing plays effectively -- so they don't create catastrophic
draw-downs on one's portfolio.
To learn more about this subject, read the bible of volatility by
by Sheldon Natenburg: Option Volatility and Pricing Strategies.
The book is available in the OIN bookstore.
One more comment...
Volatility is indeed a very important piece of the puzzle, not
only for assessing an issue's potential for price movement but
also for analyzing an option's fair value. Although prices for
exchange-listed options are established in the marketplace by
computerized pricing models, buyers and sellers do exert a strong
influence on the actual market value. More importantly, pricing
models are based upon the mistaken assumption that all stock price
movement is "random." Clearly, there are always stocks that are
moving in well-defined price trends, as opposed to moving randomly,
and if you can identify those stocks whose price trends are likely
to continue, you can achieve an edge against the option-pricing
model. Much of our effort at the OIN is devoted to finding stocks
that will continue moving in such trends, so our subscribers can
profit from buying undervalued options, selling overvalued options,
or initiating limited-risk spreads on these issues.
Good Luck!
*** WARNING!!! ***
Occasionally a company will experience catastrophic news causing
a severe drop in the stock price. This may cause a devastatingly
large loss which may wipe out all of your smaller gains. There is
one very important rule: Don't sell naked puts on stocks that you
don't want to own! It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops. Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a "buy-to-close" STOP at a price that is no more than twice
the original premium from the sold option.
SUMMARY OF PREVIOUS CANDIDATES
*****
Stock Price Last Call Strike Price Gain Potential
Symbol Picked Price Month Sold Picked /Loss Mon. Yield
RGLD 18.70 18.36 OCT 15.00 0.45 *$ 0.45 11.6%
PPD 21.41 20.24 OCT 15.00 0.60 *$ 0.60 10.7%
ABFS 27.53 28.81 OCT 25.00 0.90 *$ 0.90 10.4%
ULAB 18.83 20.75 OCT 15.00 0.40 *$ 0.40 10.4%
RGLD 18.05 18.36 OCT 15.00 0.50 *$ 0.50 9.3%
RMCI 25.80 24.11 OCT 22.50 0.60 *$ 0.60 8.6%
UTHR 16.50 16.05 OCT 15.00 0.55 *$ 0.55 8.5%
GILD 33.56 33.56 OCT 25.00 0.55 *$ 0.55 8.2%
MDG 20.40 18.15 OCT 17.50 0.55 *$ 0.55 8.2%
BSX 30.18 31.48 OCT 27.50 0.85 *$ 0.85 7.2%
AMZN 16.61 17.01 OCT 12.50 0.30 *$ 0.30 7.2%
UTHR 17.01 16.05 OCT 15.00 0.30 *$ 0.30 6.4%
COF 38.92 34.70 OCT 27.50 0.60 *$ 0.60 6.2%
TTWO 26.20 29.45 OCT 20.00 0.30 *$ 0.30 5.9%
FDS 25.95 26.50 OCT 22.50 0.35 *$ 0.35 5.2%
INVN 35.76 32.89 OCT 25.00 0.45 *$ 0.45 5.1%
STN 14.15 16.96 OCT 12.50 0.25 *$ 0.25 5.1%
IDE 25.50 20.91 OCT 22.50 0.75 $ -0.84 0.0%
*$ = Stock price is above the sold striking price.
Comments:
The threat of war with Iraq and Islamic terrorism, concerns
over recent corporate scandals and the continued decline in
quarterly earnings have conspired to keep investors fearful
of the stock market. Based on the technical outlook for the
major equity averages, that's probably a good choice and we
will continue to closely monitor all of the current plays in
the portfolio. One position that warrants an early departure
is Integrated Defense Technology (NYSE:IDE). Positions on
the early exit watch-list include Meridian Gold (NYSE:MDG)
and Right Management Consultants (NASDAQ:RMCI).
NEW CANDIDATES
*********
Sequenced by Company
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
AG 22.63 OCT 20.00 AG VD 0.45 700 19.55 21 9.5%
BYD 18.61 OCT 17.50 BYD VW 0.40 215 17.10 21 8.6%
CVC 9.94 OCT 7.50 CVC VU 0.25 1534 7.25 21 16.2%
MMSI 20.14 OCT 18.00 MRU VY 0.35 3 17.65 21 8.1%
PRX 28.20 OCT 22.50 PRX VX 0.25 102 22.25 21 6.1%
SYMC 34.30 OCT 25.00 SYQ VE 0.30 3603 24.70 21 6.1%
TTWO 29.45 OCT 25.00 TUO VE 0.35 416 24.65 21 6.6%
UDI 24.25 OCT 20.00 UDI VD 0.30 276 19.70 21 7.6%
Sequenced by Target Yield (monthly basis)
******
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
CVC 9.94 OCT 7.50 CVC VU 0.25 1534 7.25 21 16.2%
AG 22.63 OCT 20.00 AG VD 0.45 700 19.55 21 9.5%
BYD 18.61 OCT 17.50 BYD VW 0.40 215 17.10 21 8.6%
MMSI 20.14 OCT 18.00 MRU VY 0.35 3 17.65 21 8.1%
UDI 24.25 OCT 20.00 UDI VD 0.30 276 19.70 21 7.6%
TTWO 29.45 OCT 25.00 TUO VE 0.35 416 24.65 21 6.6%
PRX 28.20 OCT 22.50 PRX VX 0.25 102 22.25 21 6.1%
SYMC 34.30 OCT 25.00 SYQ VE 0.30 3603 24.70 21 6.1%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).
*****
AG - Agco $22.63 *** Testing 2002 Highs! ***
AGCO Corporation (NYSE:AG), headquartered in Duluth, Georgia, is
a global designer, manufacturer and distributor of agricultural
equipment and related replacement parts. AGCO's products are
distributed in 140 countries. AGCO offers a full product line
including tractors, combines, sprayers, forage equipment and
implements through more than 7,350 independent dealers and other
distributors around the world. AGCO's products are distributed
under the brand names AGCOSTAR, Ag-Chem, Challenger, Farmhand,
FENDT, Fieldstar, GLEANER, Glencoe, Hesston, LOR*AL, Massey
Ferguson, New Idea, SOILTEQ, Spra-Coupe, Tye, White Planters and
Willmar. AGCO provides retail financing through AGCO Finance in
North America and through Agricredit in the UK, France, Germany,
Ireland, Spain and Brazil. Goldman Sachs recently raised its
rating on AGCO and on the farm equipment sector to reflect higher
grain prices, which should result in increased capital spending.
Apparently, investors agree with the bullish assessment as the
issue is trading near 2002 highs and this position offers a low
risk entry point in a fundamentally sound company.
OCT 20.00 AG VD LB=0.45 OI=700 CB=19.55 DE=21 TY=9.5%
*****
BYD - Boyd Gaming $18.61 *** Own This One! ***
Headquartered in Las Vegas, Boyd Gaming Corporation (NYSE:BYD) is
a leading diversified owner and operator of casinos and various
entertainment properties located in Nevada, Illinois, Indiana,
Mississippi, and Louisiana. The company conducts substantially
all of its business through eight wholly owned subsidiaries:
California Hotel and Casino, Boyd Tunica, Boyd Kenner, Boyd
Louisiana, Par-A-Dice Gaming, Boyd Indiana, Boyd Atlantic City,
and Boyd Louisiana Racing. Boyd Gaming is also developing "The
Borgata," a $1 billion entertainment resort in Atlantic City,
through a joint venture with MGM MIRAGE. The gaming sector is
"hot" and Boyd Gaming is one of our favorite stocks in the group.
Investors who wouldn't mind owning the issue can establish a
cost basis near $17 with this position.
OCT 17.50 BYD VW LB=0.40 OI=215 CB=17.10 DE=21 TY=8.6%
*****
CVC - Cablevision Systems $9.94 *** Media Sector Speculation ***
Cablevision Systems Corporation (NYSE:CVC) is a cable operator
in the United States through its wholly owned subsidiary, CSC
Holdings. Cablevision also has investments in cable programming
networks, entertainment businesses and telecommunications firms.
Through Rainbow Media Holdings, the company owns interests in
and manages numerous national and regional programming networks,
the Madison Square Garden sports and entertainment business, and
cable television advertising sales companies. Through Lightpath,
the company provides switched telephone services and high-speed
Internet access to the business market. The company also owns
or has interests in a number of complementary businesses and
companies that include The WIZ, a chain of consumer electronics
stores; Clearview Cinemas, a chain of movie theaters; and also
Northcoast Communications, a wireless personal communications
services business. The media sector has been one of the better
performing groups in recent weeks and investors who want to
speculate on a recovery in one of the industry's past darlings
should consider this position.
OCT 7.50 CVC VU LB=0.25 OI=1534 CB=7.25 DE=21 TY=16.2%
*****
MMSI - Merit Medical Systems $20.14 *** Trading Range! ***
Merit Medical Systems (NASDAQ:MMSI) produces single-use medical
products for use in diagnosis and treatment of cardiovascular
disease. The firm's products are designed to provide physicians
and other healthcare professionals with devices that enable them
to perform interventional and diagnostic procedures safely and
effectively. Inflation devices are large, specialized syringes
used in interventional catheterization procedures to inflate
balloon-tipped catheters. The company's Inflation Devices and
Angioplasty Accessories include IntelliSystem 25, IntelliSystem
II color monitor, The Monarch disposable inflation device and
Basix 25 and the new BasixCOMPAK disposable inflation syringes.
The firm's MBA, Passage, AccessPlus, Double Play and Inspector
hemostasis valves are used in conjunction with other inflation
devices and as a component of its angioplasty packs. MMSI has
established a very stable trading range near our cost basis and
last week's high-volume rally to a recent high suggests future
upside potential in the issue.
OCT 18.00 MRU VY LB=0.35 OI=3 CB=17.65 DE=21 TY=8.1%
*****
PRX - Pharmaceutical Resources $28.20 *** Own This One! ***
Pharmaceutical Resources (NYSE:PRX), a holding company, develops,
manufactures, and distributes generic pharmaceuticals through its
wholly owned subsidiary, Par Pharmaceutical. Through its FineTech
unit, PRX also develops and utilizes synthetic chemical processes
to design and develop intermediate ingredients utilized in the
production of finished products for the pharmaceutical industry.
PRX currently manufactures and distributes over 139 products
representing various dosage strengths of 58 drugs. PRX recently
said it expects to exceed analysts' consensus earnings estimates
for the third quarter due to strong sales across both its core
product portfolio and its key new products. The steady upward
momentum in the company's share value suggests that investors are
bullish on its underlying business and a cost basis near $25 is
a favorable price for the issue.
OCT 22.50 PRX VX LB=0.25 OI=102 CB=22.25 DE=21 TY=6.1%
*****
SYMC - Symantec $34.30 *** Trading Range ***
Symantec Corporation (NASDAQ:SYMC) provides a broad range of
content and network security software and appliance solutions to
enterprises, individuals and service providers. The company is
a provider of client, gateway and server security solutions
for virus protection, firewall and virtual private network,
vulnerability management, intrusion detection, Internet content
and e-mail filtering, remote management technologies and security
services to enterprises and service providers around the world.
Symantec views its business in five primary operating segments:
Enterprise Security, Enterprise Administration, Consumer Products,
Services and Other. Last week, J.P. Morgan Securities analyst
Sterling Auty shifted to a positive near-term outlook on Symantec
heading into the company's quarterly report next month. Shares
of Symantec moved to the top of a recent trading range on the news
and the technical support area near $30-$31 provides an excellent
margin of safety for traders who wish to speculate on its near-term
share value.
OCT 25.00 SYQ VE LB=0.30 OI=3603 CB=24.70 DE=21 TY=6.1%
*****
TTWO - Take-Two Interactive $29.45 *** All-Time High! ***
Headquartered in New York City, Take-Two Interactive Software
(NASDAQ:TTWO), is an integrated global developer, marketer,
distributor and publisher of interactive entertainment software,
games and accessories for the PC, PlayStation, PlayStation2,
Xbox, Nintendo GameCube, and Nintendo Game Boy Advance. The
company publishes and develops products through its wholly owned
subsidiary labels: Rockstar Games, Gotham Games, Gathering of
Developers, Joytech and Global Star. The firm maintains sales
and marketing offices in Cincinnati, New York, Toronto, London,
Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland.
Shares of video game publisher Take-Two Interactive Software
have remained in a bullish trend, despite the slump in hi-tech
issues, and Friday the stock traded at a new "all-time" high.
Traders who believe the rally will continue can speculate on
that outcome with this position.
OCT 25.00 TUO VE LB=0.35 OI=416 CB=24.65 DE=21 TY=6.6%
*****
UDI - United Defense $24.25 *** Defense Sector Speculation ***
United Defense Industries (NYSE:UDI) is a leader in the design,
development and production of combat vehicles, artillery, naval
guns, missile launchers and precision munitions used by the U.S.
Department of Defense and allies worldwide. The company is
America's largest non-nuclear ship repair, modernization and
conversion company. UDI was recently started with a "buy" rating
by J.P. Morgan as analysts said the company's prospects are strong
despite the recent loss of the Crusader program. A J.P. Morgan
analyst said the company has no commercial aerospace exposure
and Crusader's replacement weapon, the Army's non-line-of-sight
cannon, should easily make up for the loss of Crusader. Defense
stocks are likely to rally if the U.S. starts a war with Iraq and
this position offers a favorable cost basis in the issue.
OCT 20.00 UDI VD LB=0.30 OI=276 CB=19.70 DE=21 TY=7.6%
*****
*****************
SUPPLEMENTAL NAKED PUT CANDIDATES
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Target Yield (monthly basis)
******
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
AFCO 10.75 OCT 10.00 UOF VB 0.40 5 9.60 21 14.7%
RTIX 8.00 OCT 7.50 RQK VU 0.25 0 7.25 21 12.3%
MCHP 20.91 OCT 17.50 QMT VW 0.40 816 17.10 21 10.8%
CMLS 17.58 OCT 15.00 UUC VC 0.35 80 14.65 21 10.6%
MATK 16.75 OCT 15.00 KQT VC 0.30 5 14.70 21 8.3%
NBR 32.86 OCT 27.50 NBR VY 0.40 524 27.10 21 7.1%
PLMD 26.25 OCT 20.00 PM VD 0.25 113 19.75 21 6.6%
EMMS 19.62 OCT 17.50 QMJ VW 0.25 3 17.25 21 6.1%
UNFI 22.40 OCT 20.00 JQN VD 0.25 10 19.75 21 5.3%
SEE DISCLAIMER IN SECTION ONE
*****************************
************************
SPREADS/STRADDLES/COMBOS
************************
Another One-Day Wonder!
By Ray Cummins
The major equity averages plunged Friday, giving back almost all
of their recent gains after blue-chip bellwethers Philip Morris,
General Electric and SBC Communications disgorged a glut of
negative news.
The Dow Jones Industrials slid 295 points to 7,701 amid a profit
warning from Philip Morris (NYSE:MO), massive job cuts at SBC
Communications (NYSE:SBC), and a downgrade of General Electric
(NYSE:GE). Coca-Cola (NYSE:KO) was the only Dow component that
gained during the session. Technology stocks also finished lower
with the NASDAQ Composite down 22 points to 1,199 after holding
in the black for much of the day. Telecom stocks and wholesale
electronic suppliers were among the worst performers. The S&P
500-stock index fell 27 points to 827 as pharmaceutical, airline
and retail issues declined. Trading volume was average at 1.49
billion on the NYSE and at 1.46 billion on the NASDAQ. Breadth
was terrible with losers tripling winners by 3 to 1 on the NYSE
while declining stocks outnumbered advancing stocks more than 2
to 1 on the technology exchange. Government bonds soared as
stocks fell with the 10-year Treasury note up 27/32 to yield 3.68%
while the 30-year bond gained 22/32 to yield 4.68%. On the fund
flow front, Trim Tabs estimated that all equity funds had outflows
of $7.3 billion over the past week compared with outflows of $4.6
billion in the prior week.
*****************
PORTFOLIO SUMMARY
*****************
(As of 09-27-02)
PUT CREDIT SPREADS
******************
Symbol Pick Last Month L/P S/P Credit C/B (G/L) Status
BLL 53.75 50.91 OCT 45 50 0.70 49.30 $0.70 Open
OEX 446.00 413.22 OCT 395 400 0.45 399.55 $0.45 Open
OHP 42.62 39.34 OCT 33 35 0.30 34.70 $0.30 Open
NOC 124.54 126.76 OCT 105 110 0.35 109.65 $0.35 Open
Ball Corporation (NYSE:BLL) and the bullish portion of the OEX
credit-spread strangle are both on the early exit watch-list.
CALL CREDIT SPREADS
*******************
Symbol Pick Last Month L/C S/C Credit C/B (G/L) Status
PHA 40.86 38.24 OCT 50 45 0.60 45.60 $0.60 Open
OEX 446.00 413.22 OCT 500 495 0.45 495.45 $0.45 Open
SLAB 19.66 18.57 OCT 30 25 0.40 25.40 $0.40 Open
BRL 63.65 61.45 OCT 75 70 0.50 70.50 $0.50 Open
LXK 43.49 48.49 OCT 55 50 0.50 50.50 $0.50 Open
MMM 119.46 112.55 OCT 135 130 0.40 130.40 $0.40 Open
WFC 46.89 48.45 OCT 55 50 0.55 50.55 $0.55 Open
Lexmark (NYSE:LXK) has rebounded strongly in recent sessions
and despite Friday's sell-off, the issue is testing a near-term
resistance area. A move through $50 on heavy volume would
signal a potential exit (or adjustment) in the position.
SYNTHETIC (BULLISH)
*******************
Symbol Pick Last Month L/C S/P Credit M/V (G/L) Status
BYD 17.71 18.61 DEC 20 15 (0.15) 0.90 0.75 Open
CVC 9.48 9.94 DEC 15 5 (0.10) 0.60 0.50 Open?
TARO 32.55 34.90 OCT 37 27 0.10 0.40 0.50 Open
All of our bullish synthetic positions have yielded favorable
short-term profits.
SYNTHETIC (BEARISH)
*******************
Symbol Pick Last Month L/P S/C Credit M/V (G/L) Status
MET 25.25 22.96 JAN 20 30 0.05 0.65 0.70 Open
PFE 30.75 28.58 JAN 25 35 0.15 0.70 0.85 Open
BRCD 12.33 7.83 JAN 10 15 (0.05) 2.60 2.55 Open
MRK 45.74 46.26 OCT 40 50 0.10 0.15 0.25 Open
Brocade Communications (NASDAQ:BRCD) was the big winner this
week with a closing credit of up to $2.55 as the issue traded
at a new 2002 low.
BULL CALL SPREADS
*****************
Symbol Pick Last Month L/C S/C Debit M/V B/E Status
LUME 5.80 3.88 JAN 5 7 1.00 0.90 6.00 Open?
CALENDAR SPREADS
****************
Symbol Pick Last Long-Opt Short-Opt Debit M/V Status
SGP 23.67 21.74 JAN-27.5C OCT-27.5C 0.80 0.75 Open
LEH 49.69 49.13 JAN-40P OCT-40P 1.90 1.75 Open
SHORT-PUT COMBOS
****************
Symbol Pick Last Short-Opt Long-Opt Credit M/V Status
AES 2.92 2.46 J04-7.5 J03-2.5 4.50 4.25 Open
CREDIT STRANGLES
****************
Symbol Pick Last Month S/C S/P Credit C/V (G/L) Status
ADRX 24.65 22.65 OCT 40 15 1.10 0.35 0.75 Open
ISIS 8.97 9.15 OCT 15 8 1.50 0.80 0.70 Open
QCOM 28.58 28.61 OCT 32 22 1.50 0.75 0.75 Open
TKTX 34.41 32.13 OCT 45 25 1.55 1.00 0.55 Open
PPD 21.80 20.24 OCT 25 17 1.95 1.15 0.80 Open
STJ 36.29 36.68 OCT 40 30 1.00 0.90 0.20 Open
Questions & comments on spreads/combos to Contact Support
*************
NEW POSITIONS
*************
Today's list of candidates will be significantly reduced as I
am working with limited capabilities on a notebook computer. My
desktop PC crashed last week (motherboard problems) and, after a
lengthy diagnostic examination, the technician said it might be
best if I simply purchased a new unit (ARGHH!). So, I apologize
for the effects of this untimely event and I hope that things get
back to normal very soon.
**************
CREDIT SPREADS
**************
These candidates are based on the underlying issue's technical
history or trend. The probability of profit in these positions
may be higher than other plays in the same strategy, due to
small disparities in option pricing. Current news and market
sentiment will have an effect on these issues, so review each
play individually and make your own decision about its outcome.
*****
UOPX - University of Phoenix Online $32.11 *** Strong Sector ***
University of Phoenix Online (NASDAQ:UOPX) is a provider of
accessible, accredited educational programs for working adults.
It began operations in 1989 by modifying courses developed by
University of Phoenix's physical campuses for delivery via modem
to students worldwide. University of Phoenix Online offers 11
accredited degree programs in business, education, information
technology and nursing. Students can log on to their online
classes anytime via the Internet by using basic technology such
as a Pentium-class personal computer, a modem and an Internet
service provider, thereby enhancing the accessibility of and the
potential market for its programs. As of 8/31/2001, University
of Phoenix Online had approximately 29,000 students and 2,600
faculty members.
PLAY (conservative - bullish/credit spread):
BUY PUT OCT-25 UBY-VE OI=13 A=$0.30
SELL PUT OCT-30 UBY-VF OI=0 B=$0.85
INITIAL NET-CREDIT TARGET=$0.60-$0.65
POTENTIAL PROFIT(max)=14% B/E=$29.40
*****
ASD - American Standard Companies $64.56 *** Earnings Play ***
American Standard Companies (NYSE:ASD) is a global, diversified
manufacturer of high-quality, brand name products in three major
product groups: air conditioning systems and services, bathroom
and kitchen fixtures and fittings and vehicle control systems for
heavy and medium-sized trucks, buses, trailers, luxury cars and
sport utility vehicles. American Standard operates in three main
business segments, which are Air Conditioning Systems and Services,
Plumbing Products and Vehicle Control Systems. The firm's brand
names include Trane and American Standard for air conditioning
systems, American Standard, Ideal Standard, Standard, Porcher,
Jado, Armitage Shanks, Dolomite, Meloh, Venlo and Borma for
plumbing products and Wabco for vehicle control systems. The
company also conducts significant non-United States operations
through subsidiaries. The company's quarterly earnings are due
on October 16.
PLAY (moderately aggressive - bearish/credit spread):
BUY CALL OCT-75 ASD-JO OI=4121 A=$0.30
SELL CALL OCT-70 ASD-JN OI=1170 B=$0.90
INITIAL NET CREDIT TARGET=$0.65-$0.70
POTENTIAL PROFIT(max)=15% B/E=$70.65
*******************
S - Sears $40.62 *** New 2002 Low! ***
Sears, Roebuck and Company (NYSE:S) is a North American retailer.
The company is organized into four principal business segments:
Retail and Related Services, Credit and Financial Products,
Corporate and Other, and Sears Canada. The domestic business
segments are Retail and Related Services, Credit and Financial
Products and Corporate and Other. The Sears Canada segment
consists of similar retail, credit and corporate operations
conducted through a majority-owned subsidiary in Canada. Retail
and Related Services consist of 867 full-line stores located
primarily in malls nationwide. The firm's Credit and Financial
Products segment manages Sears' domestic portfolio of credit
card receivables. Sears' Corporate and Other operations include
activities that are of an overall holding company nature. The
company conducts similar retail, credit and corporate operations
in Canada through Sears Canada, a consolidated subsidiary of
Sears.
PLAY (conservative - bearish/credit spread):
BUY CALL OCT-50 S-JJ OI=8777 A=$0.20
SELL CALL OCT-45 S-JI OI=14335 B=$0.65
INITIAL NET-CREDIT TARGET=$0.50-$0.55
POTENTIAL PROFIT(max)=11% B/E=$45.50
*******************
SYNTHETIC POSITIONS
*******************
These stocks have established trends and favorable option premiums.
Traders with a directional outlook on the underlying issues may
find the risk-reward outlook in these momentum plays attractive.
*****
DIAN - Dianon Systems $46.10 *** Recovery In Progress ***
Dianon Systems (NASDAQ:DIAN) provides a full line of anatomic
pathology testing services and a number of genetic and clinical
chemistry testing services to patients, physicians and managed
care organizations throughout the United States. The company's
principal physician audience for these services includes over
50,000 clinicians engaged in the fields of medical oncology,
urology, dermatology, gynecology and gastroenterology. Dianon
is a specialized provider of anatomic pathology testing services
in the United States.
Strategy Explanation:
Here is a way to capitalize on an anticipated stock movement
without spending as much money as you would when purchasing the
issue in the open market. If you buy stock you are considered
"long" the stock, as you own it, and you participate in all of
its upward movement. In this case, you buy an out-of-the-money
call to take advantage of this possible upward movement, and you
sell an out-of-the-money put to pay for the call. Selling an
OTM put limits the potential downside risk, however you should
use trading stops or be willing to own the stock in the event of
a significant trend reversal. Of course, you have a reasonable
cushion under the current stock price as move sideways or decline
a small percentage and you will not lose money. But, be careful
when using other stocks as portfolio collateral. If the market
collapses, the stocks that were going to be your collateral might
be worth a lot less. As with any position, do not risk more than
you can afford to lose in a worst case scenario.
Strategy Benefits:
1. The results can be similar to owning the underlying stock
and the potential gain is unlimited.
2. Portfolio collateral can be used to finance the play.
PLAY (speculative - bullish/synthetic position):
BUY CALL NOV-60 UID-KL OI=7 A=$0.75
SELL PUT NOV-35 UID-WG OI=200 B=$0.55
INITIAL NET-DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50-$0.75
Note: Using options, the position is similar to being long the
stock. The initial collateral requirement for the sold (short)
put is approximately $990 per contract.
*****
ERTS - Electronic Arts $67.73 *** New Trading Range? ***
Electronic Arts (NASDAQ:ERTS) is a global software company that
operates in two principal business segments. EA's Core business
segment comprises the creation, marketing and distribution of
entertainment software, while the EA.com business segment is
composed primarily of the creation, marketing and distribution of
entertainment software that can be played or sold online, ongoing
management of subscriptions of online games and advertising. EA
also owns Pogo Corporation, which operates an ad-supported games
service that reaches a broad consumer market. Pogo's unique
Internet-based family games focus on easy-to-play card, board and
puzzle games.
PLAY (speculative - bullish/synthetic position):
BUY CALL NOV-75 EZQ-KO OI=607 A=$1.70
SELL PUT NOV-60 EZQ-WL OI=183 B=$1.85
INITIAL NET-CREDIT TARGET=$0.25-$0.40 TARGET PROFIT=$0.90-$1.40
Note: Using options, the position is similar to being long the
stock. The initial collateral requirement for the sold (short)
put is approximately $2,100 per contract.
*****
PGR - Progressive Insurance $50.96 *** Failed Recovery? ***
The Progressive Corporation (NYSE:PGR) is an insurance holding
company for 73 subsidiaries, one mutual insurance firm affiliate
and one reciprocal insurance company affiliate. The company's
insurance subsidiaries and affiliates provide personal automobile
insurance and other specialty property-casualty insurance and
related services throughout the United States. Progressive's
property-casualty insurance products protect its many customers
against collision and physical damage to their motor vehicles
and liability to others for personal injury or property damage
arising out of the use of those vehicles. The firm's quarterly
earnings are due October 16, 2002.
PLAY (speculative - bearish/synthetic position):
BUY PUT NOV-45.00 PGR-WI OI=464 A=$0.95
SELL CALL NOV-56.62 PGR-KY OI=217 B=$0.60
INITIAL NET-DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$1.00
Note: Using options, the position is similar to being short the
stock. The initial collateral requirement for the sold call is
approximately $1,550 per contract.
***********************
STRADDLES AND STRANGLES
***********************
Based on analysis of the historical option pricing and technical
background, these positions meet the fundamental criteria for
favorable volatility-based plays.
*****
OMC - Omnicom Group $55.86 *** Premium Selling! ***
Omnicom Group (NYSE:OMC) is a worldwide marketing and corporate
communications company. Omnicom has grown its strategic holdings
to over 1,500 subsidiary agencies operating in more than 100
countries. The company's wholly and partially owned businesses
provide communications services to clients on a global, national,
and pan-regional basis. The firm's agencies provide an extensive
range of marketing and corporate communications services such as
advertising, brand consultancy, crisis communications, custom
publishing, database management, digital and interactive marketing,
direct marketing, directory and business-to-business advertising,
employee communications and environmental design. Omnicom also
provides field marketing, healthcare communications, marketing
research, media planning and buying, multi-cultural marketing,
non-profit marketing, promotional marketing, public affairs, public
relations, recruitment communications, specialty communications and
sports and event marketing.
PLAY (conservative - neutral/credit strangle):
SELL CALL OCT-65 OMC-JM OI=3171 B=$0.45
SELL PUT OCT-40 OMC-VH OI=1599 B=$0.40
INITIAL NET-CREDIT TARGET=$0.85-$0.95 PROFIT(max)=7%
UPSIDE B/E=$65.85 DOWNSIDE B/E=$39.15
********************
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